The relevance of security analyst opinions for investment decisions

Abstract

Security analysts analyze information regarding publicly traded companies after which they publish their opinion regarding these companies’ stocks. In this dissertation the published opinions of two different types of analysts are analyzed. Technical analysts derive a recommendation to buy, hold, or sell a stock from past price and volume data. Fundamental analysts analyze firm fundamentals such as corporate earnings and growth prospects. They subsequently publish a recommendation and a target price which captures the analyst’s expectations regarding the future stock price. The extent to which the stock market responds to the announcement of analyst recommendations provides information about the degree of market efficiency. This dissertation shows that technical analyst recommendations published on both stocks and the market index in the Netherlands are strongly related to short-term historical price trends. However, on average no abnormal returns are observed after the publication of this type of recommendations. It could therefore not be established that technical analyst recommendations are relevant for investment decisions. Hence, the notion of weak-form market efficiency could not be rejected. In contrast, the stock market is not fully semi-strong efficient, as analyst opinions exhibit relevance for investment decisions: recommendations regarding South African stocks are related to future stock price performance, and target price implied returns are positively associated with realized takeover premiums in the United States (US). Furthermore, US merger bids below the average target price are more likely to be rejected. With regard to takeover bids, general determinants of cross-border takeover activity are also studied in this dissertation. It is found that especially valuation played an important role: acquirers (targets) tend to originate from countries with relatively high (low) market-to-book values.