How good are the analysts’ recommendations?

Abstract

This paper is about the investment performance of following analysts’ recommendations on Icelandic companies. There is an average of almost 2% difference in performance between companies with “overweight” recommendation compared to those with “underweight” recommendation. The difference is also positive for risk adjusted returns and after accounting for transaction costs. Furthermore, the average result from following “buy”/”sell” recommendations is also positive but insignificant. In both cases the performance depends on reacting to new recommendations on the announcement day.