Analyst Recommendations and Stock Returns Evaluating the performance of Nordic markets based on analyst consensus recommendations, and the impact of MiFID II

Abstract

This study evaluates the performance of equity analysts who cover publicly traded stocks in the Nordic markets. To assess their performance, we employ a method that involves creating daily rebalanced portfolios based on the consensus recommendation for each covered company over four years. The returns achieved by these portfolios are then compared to benchmarks using both value and equal weighting. Additionally, to make it as realistic as possible, we account for transaction costs. We find that stocks with favorable consensus recommendations consistently outperform their respective benchmarks, whereas stocks with unfavorable recommendations tend to underperform. Our findings indicate that investing in the most favored equally weighted portfolio yields significant positive abnormal annual net returns, indicating that stock recommendations issued on companies traded in Nordic markets have investment value. We also investigate the impact of MiFID II to determine if it has a positive effect on performance. However, our analysis does not reveal a clear pattern, and we cannot conclude that the regulations have had a positive effect.