Do Sell-Side Security Analysts Act as Prophets?

Abstract

The investment banks, brokerage houses, and pension funds spend large amounts of capital to hire security analysts to predict earnings, stock recommendations, and target prices for their customers and public investors. These observations raise a compelling empirical motivation for the researcher to investigate Do Sell-Side Security Analysts (SSSA) can forecast earnings, stock recommendations, target prices, and particularly consensus prices (average target prices) accurately. The population of the study includes public listed companies in Colombo Stock Exchange which are of interest to the SSSA in their equity research studies but all the listed companies cannot be considered as the population since there are companies that haven't used in the stock market research or equity research studies of the brokering firms. The number of companies qualifying for the study is based on the sample selection criteria to limit the analysis to a realistic level. There are 22 listed companies, qualified for the study from 2012 to 2018. In calculating monthly stock returns, the researcher assumes that any form of declaration of remittances such as dividends, bonus issues, stock splits, and right issues encourage investors to purchase the stock and it causes the price of a stock to increase. In general, the increase is about equal to the amount of the benefit, however, the actual price change is based on market activity. Finally, the results of hypothesis testing through multiple regression models discuss to achieve the research objectives. The findings of the study have important implications for diverse users to formulate their future policy decisions for the development of the stock market and the economy. The investigation reveals that there is a statistically significant positive relationship between Rit and RCP.