Initiation of brokers’ recommendations, market predictors and stock returns

We study more than 5000 broker recommendations on companies listed on the Australian Stock Exchange, focusing in particular on ‘initiating recommendations’. We find that returns on initiating recommendations are significantly different from zero in the 6 months following the release of the recommendation. We also find that ‘strong buy’ and ‘buy’ recommendations provide better predictions than those formed from market-based variables cited in the literature. In contrast to the short event window studies in the US, there is no significant difference between returns on initiating and continuing recommendations. Mean returns on all categories of recommendations on technology-related companies are negative, reflecting the technology bubble in the period of our study. Finally, variables, such as broker prestige and membership of the Australian All Ordinaries Index have no explanatory power.