The Relative Profitability of Analysts' Stock Recommendations: What Role Does Investor Sentiment Play?

This study investigates whether analysts who respond to investor sentiment issue more or less profitable stock recommendations than their peers. We find that, on average, analysts issue more favorable stock recommendations when recent and future sentiment is more bullish. Additionally, we show that, on average, analysts who respond to investor sentiment issue relatively less profitable stock recommendations. However, analysts who follow stocks that are most sensitive to investor sentiment and who follow recent trends in sentiment are able to offer more profitable recommendations than their peers. Our results suggest that analysts recommend stocks based, in part, on signals that may affect price but that are not theoretically related to firms' intrinsic value. Moreover, our results may help explain findings within the literature that suggest analysts fail to fully incorporate their own earnings forecasts into their stock recommendations.