An Analysis of Brokerage House Securities Recommendations

10 Pages Posted: 8 Feb 2001

See all articles by Wilbur G. Lewellen

Wilbur G. Lewellen

Purdue University; National Bureau of Economic Research (NBER)

John C. Groth

Texas A&M University - Department of Finance

Ronald C. Lease

Purdue University - Krannert School of Management; National Bureau of Economic Research (NBER)

Gary G. Schlarbaum

Morgan Stanley; National Bureau of Economic Research (NBER)

Date Written: January 1, 1980

Abstract

A study of one brokerage house's recommendations to its individual customers during the 1960s suggests that they were genuinely valuable, even after allowing for transactions costs and risk. On the other hand, the recommendations were useful in selection, rather than in market timing: The ratio of buys to sells varied little over the period studied.

Abnormal returns were associated primarily with buy, rather than sell, recommendations. Positive in the six months prior to the recommendation, they peaked in the month of recommendation and remained essentially zero thereafter. One possible explanation is that, in the months prior to being recommended, companies enjoyed abnormal prosperity accompanied by a series of favorable news items. Their prosperity caught the attention of the brokerage house, whose research staff than uncovered additional positive news, encapsulating in recommendations to customers what might otherwise have been several more months of slowly emerging information.

If large positive returns in the month of the recommendation were merely the result of trading pressure induced by the recommendation, those returns would have been followed by reversals. The absence of such reversals suggests that the brokerage house's recommendations were associated with genuine changes in the value of the securities.

Suggested Citation

Lewellen, Wilbur (BIll) Garrett and Groth, John C. and Lease, Ronald C. and Schlarbaum, Gary G., An Analysis of Brokerage House Securities Recommendations (January 1, 1980). Available at SSRN: https://ssrn.com/abstract=248584

Wilbur (BIll) Garrett Lewellen (Contact Author)

Purdue University ( email )

West Lafayette, IN 47907-1310
United States
317-494-4397 (Phone)
317-494-9658 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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John C. Groth

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States

Ronald C. Lease

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Gary G. Schlarbaum

Morgan Stanley

1585 Broadway
New York, NY 10036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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