How Good Are Analysts at Handling Crisis? - A Study of Analyst Recommendations on the Nordic Stock Exchanges during the Great Recession

Sammanfattning: The purpose of this thesis is to gain better understanding of the value of analyst recommendations. We show, by studying analyst consensus recommendations on four Nordic stock exchanges that during the Great Recession analysts' ability to generate profitable stock recommendations declined. The abnormal profit of the stocks with favorable consensus recommendations declined during the crisis, at the same time as that of the stocks with the least favorable consensus recommendations increased and became positive. We use value weighted portfolios, which are rebalanced weekly, and examine their benchmark-adjusted return and alpha, applying the Fama-French three factor model. The implication for investors is that they should be careful when adhering to analyst recommendations in extreme market conditions, since the economic environment will affect the quality of the recommendations. This result also suggests that a price drift caused by the recommendations themselves, rather than analysts' ability to predict future returns, could explain any abnormal profit generated by following analyst recommendations. Furthermore, we discuss if the positive abnormal profit from the stocks with least favorable recommendations could be explained by the flight-to- safety phenomenon, which appeared during the crisis, since these stocks are characterized by higher book-to-market values.