Are Analysts Really Optimistic in Their Stock Recommendations? The Case of the Polish Capital Market

ABSTRACT

This paper examines the relation between the quality of forecasts and the types of analysts’ stock recommendations. Using hand-collected data on stock recommendations issued for companies listed on the Warsaw Stock Exchange (WSE) in the period 2005–2012, we find that, despite analysts’ clear tendency to issue positive stock recommendations, this tendency generally does not affect the quality of their forecasts in all types of stock recommendations. The accuracy of forecasts, however, decreases as the complexity of the forecasted items (revenue, EBIT, net income, and FCF) increases. We also find no clear difference in the level of analysts’ optimism (pessimism) in their forecasts between different types of stock recommendations, but analysts’ optimism is visible in the size of their forecasts’ overestimation. The findings can help in assessing the value of the stock recommendation on the WSE.

KEYWORDS:

• Analysts’ optimism
• cash-flow forecast
• earnings forecast
• forecast error
• stock recommendation
• WSE

JEL CLASSIFICATION:

• D53
• G14
• G17
• G24

Notes

1. In Poland, the most popular types of recommendations are buy, accumulate, hold, neutral, reduce, and sell.

2. Glamor stocks refer to positive momentum, high-growth, high-volume, and relatively expensive shares.

3. Biuro Maklerskie Banku BGŻ S.A., Biuro Maklerskie Banku BPH S.A. Dom Inwestycyjny BRE Banku S.A Dom Maklerski AmerBrokers S.A. Dom Maklerski IDM S.A. Dom Maklerski BDM S.A. Dom Maklerski Banku Ochrony Środowiska S.A. Dom Maklerski Banku BPS S.A. Dom Maklerski Banku BZ WBK S.A. Mercurius Dom Maklerski Sp. z o.o. Millennium Dom Maklerski S.A. Dom Maklerski Noble Securities S.A. Dom Maklerski Banku Pekao S.A. Dom Maklerski Banku PKO Bank Polski S.A.

4. We removed cases for which signed forecast error (calculated as the difference between forecasted and actual value of the analyzed parameters and divided by the absolute value of the actual value) was greater than Q1 + 3 IQR or less than Q3 – 3 IQR, where Q1 is the first quartile, Q3 the third quartile, and IQR the interquartile range (Q3 – Q1).