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Photo courtesy of Yonhap News |
[Alpha Biz= Paul Lee] A new study has found that the investment value of analyst recommendations and target prices published in brokerage reports has not been observed since 2013.
The decline is attributed to an optimistic bias and weakening discriminatory power in analyst ratings and target prices, as well as reduced access to corporate information, which has undermined analysts’ information advantage.
According to the financial investment industry on the 25th, Kim Jun-seok, Senior Research Fellow at the Korea Capital Market Institute, made the findings in a recent report titled “The Investment Value of Analyst Recommendations and Target Prices.”
Kim analyzed whether portfolios constructed based on analyst consensus ratings and target prices outperformed the market, using approximately 700,000 equity research reports on listed Korean companies published by domestic analysts between 2000 and 2024.
The results showed that portfolios with higher consensus ratings or higher expected return consensus delivered statistically significant excess returns over the market. Kim explained that this indicates analyst recommendations and expected return consensus contain information about future changes in firm value, demonstrating long-term investment relevance.
However, a time-series analysis revealed that excess returns declined sharply after 2013 and lost statistical significance. Notably, even portfolios composed of positively rated stocks generated statistically significant negative excess returns during certain periods after 2013.
Kim concluded that these findings suggest the investment value of analyst recommendations and expected return consensus effectively disappeared after 2013.
As a primary reason, Kim cited the erosion of the discriminatory power of analyst ratings and target prices. The proportion of stocks with a “buy” consensus rose from 38% prior to 2012 to 69% after 2013, while the difference in rating scores between the highest- and lowest-ranked consensus portfolios narrowed from 1.12 to 0.75. This, he said, reflects an intensifying “buy” bias among analysts.
Another contributing factor may be the weakening of analysts’ information advantage. Kim noted that growing legal risks associated with acquiring and producing firm-specific information have curtailed communication between analysts and companies, potentially reducing the depth and quality of analysts’ insights.
The lack of proprietary information makes independent assessments—particularly negative evaluations—more difficult, increasing reliance on public disclosures such as earnings announcements. This, in turn, may lead to clustering of ratings and target prices, further diminishing their discriminatory power.
Kim also added that improved market efficiency, which has reduced delays in the incorporation of information into stock prices, cannot be ruled out as another contributing factor.
Alphabiz Reporter Paul Lee(hoondork1977@alphabiz.co.kr)
