| Summary: | This paper examines analyst recommendations in Singapore, Malaysia and Thailand, the three largest stock exchanges in Southeast Asia. By constructing monthly-rebalanced portfolios of stocks classified by the levels of recommendations the stocks received and the revisions in these recommendations, this study investigates the value of recommendations by examining the monthly portfolio returns from November 1993 to February 2008. In addition, the study also implements controls for the divergence and the number of analysts following the stocks to examine their effect on returns.
Our results show that findings from prior research on Western developed countries are not representative of Southeast Asian markets. Evidence from the study suggests that in Singapore and Malaysia, recommendation levels contain little or no information; but in Thailand, investors may extract valuable information from recommendation levels. Consistent with prior literature, recommendation changes have robust predictive power for monthly returns in all three markets.
In addition, the study also suggests that the number of recommendations adds value for investors significantly in Malaysia and marginally in Thailand, while the divergence in recommendations contains valuable information only in Malaysia. Although these factors can potentially allow investors to reap better returns following such investment strategies, this study also observe that more favourably recommended portfolios do not always outperform the less favourably recommended ones, indicating that investors should be cautious when following analysts recommendations levels and/or changes in any market.
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