‘Hidden Recommendations’: A Re-Classification of Stock Recommendations

March 26, 2013 Leave a comment

‘Hidden Recommendations’: A Re-Classification of Stock Recommendations

Ronald Espinosa University of California, Berkeley – Accounting Group

December 14, 2012

Abstract: 
Using a large database of analysts’ target prices and recommendations issued over the period 1999-2011, this paper documents the presence of inconsistencies between recommendation and implied return in the sell-side analysts’ target prices, and analyzes its impact on market prices. In particular, it analyzes if these inconsistencies are identified by investors at the announcement and if they are related to incentives to manipulate the recommendations. The paper finds that investors are capable to identify these inconsistent signals among the rest of recommendations. This study also shows that the inconsistencies between recommendation and implied return would be explained by analysts’ incentives to bias the stock recommendation upward (downward), against the direction suggested by the implied return, when the stock presents higher (lower) recent past performance, higher (lower) “glamour” characteristics and higher (lower) brokerage fee potential.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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