Profitability of investment strategies developed on the basis of buy and sell recommendations

Abstract

Aim/purpose – The paper has two objectives. The first is to examine the profitability of applying investment strategies based on “buy” and “sell” recommendations issued by stock market analysts. The second objective is to validate that analysts who issue a rec- ommendation may not be impartial (not supporting any of the sides involved in an argu- ment) because the largest group of recommendations issued is “buy” recommendations. Design/methodology/approach – This study was conducted based on all the “buy” and “sell” recommendations issued during the period between January 1, 2004 and Decem- ber 31, 2016 for companies listed on the Warsaw Stock Exchange, using data from www.bankier.pl. The annual forecast rates of return were determined for all the recom- mendations included in the survey. The expected rates of return were determined for each recommendation based on the information collated from the Bloomberg database. The regression analysis enabled the exploration of the relationship between the actual rates of return and the rates of return predicted in recommendations. Findings – It was determined that investing on the basis of the information included in “sell” recommendations might make it possible to avoid unprofitable investments. At the same time, the study shows that an investment strategy compliant with “buy” recom- mendations does not let the investor achieve the expected rates of return on an invest- ment in the capital market in the long term. Research implications/limitations – The conducted research could be an important source of information for stock market investors’ decision-making regarding invest- ments. Originality/value/contribution – Despite the topic of recommendation effectiveness being very important from the perspective of capital market theory and practice, it is still unclear whether investing based on information provided in stock market recommenda- tions can be a profitable strategy in the long run. The study offers a bridge to fill the existing research gap. Keywords: recommendations, stock exchange, investment. JEL Classification: G140.