Commentary: When stock analysts move markets, should retail investors follow?

But producing market-moving research is incredibly difficult. Thousands of investment professionals are constantly evaluating publicly-listed companies. For an analyst report to move a stock price significantly, it must offer new insights that investors have not yet incorporated into their valuations.

In a 2011 study where my co-author and I examined more than 150,000 analyst recommendation changes for US stocks, we found only about one in eight such changes were accompanied by a large stock-price movement in the direction of the change. Most had no discernible impact on share prices, when measured from the day the recommendation was issued through the following trading day.

To illustrate just how difficult it is to produce market-moving research, one in four analysts in our study never issued a single influential recommendation change. Even among those who had managed to move stock prices at least once, only one in five of their recommendation changes were significant.

WHEN DO STOCK CALLS BECOME MARKET-MOVING?

So, when does an analyst recommendation change become impactful?

Track record matters. Analysts who have moved markets before, won awards or have a history of issuing recommendations ahead of their peers tend to be more influential.

Recommendations that move away from the prevailing consensus, or are accompanied by earnings forecasts, are more likely to move stock prices too.

Company characteristics also play a role. Analyst recommendations tend to be more influential for smaller companies, growth stocks, and companies where analysts disagree considerably about future earnings.

These findings are based on historical US data but the underlying economic reasoning suggests that similar forces may operate here in the Singapore market.