Abstract
This research investigates the contribution (if any) of sell side analysts towards profitable investment decisions for investors in India. A sample of 1,000 target prices issued with buy ratings issued between 2007 and 2011 is used to investigate if investors have benefitted from these target price forecasts. The accuracy of target price forecasts is assessed by investigating if target price forecasts have been achieved anytime during the forecast horizon of one year.
Analysts are found to meet their target price forecasts with 57.6 percent accuracy which is better than 55.6 percent target price accuracy reported from 16 countries. This implies that analysts perform in line with global analyst performance. The findings support the proposition that analyst recommendations with buy ratings have investment value in India and investors can benefit by tracking buy recommendations issued by analysts.
The research was developed further and factors affecting target price accuracy for buy recommendations were investigated through regression analysis of panel data. Promoter holding was found to have a significant and negative impact on target price accuracy. This implies that analysts produce less accurate results with companies in which promoters have bigger role in managing company�s resources and share prices. Stocks with high promoter holding indicate the possibility of insider trading to outsmart the market. Further, regression analysis reveals that price to book is significantly and positively linked with target price accuracy. Fund managers believe that emerging market stocks tend to trade at premium to book values as companies have successfully managed their ROE better than cost of capital. The authors infer that analysts outperform with buy ratings on stocks with higher ROE than cost of capital. Analyst optimism was found to significantly reduce target price accuracy. The results with respect to analyst optimism are in line with the results reported from developed markets like Germany. Past research suggests that higher analyst optimism is possibly associated with trade generation and brokerage revenues out of retail clients. The regression results are supported by a battery of tests associated with panel data.
The authors conclude by suggesting that investors, to some extent, can rely on equity research in India for profit-making investment decisions in stocks. The key message is that equity research induced buying has investment value in India.