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WHEN EUROPEAN ANALYSTS DISAGREE,
WHO SHOULD YOU PAY ATTENTION TO?
A FUND MANAGER’S PERSPECTIVE BY CAMPBELL HARVEY (PhD), SANDY RATTRAY, JOACHIM UTANS (PhD) AND YASSER MAWJI
CAMPBELL HARVEY BEGAN WORKING WITH GLG IN MAY 2005 AND IS A PROFESSOR AT DUKE UNIVERSITY, SANDY RATTRAY
AND JOACHIM UTANS ARE ASSET MANAGERS AT GLG PARTNERS, YASSER MAWJI IS AN ANALYST AT GLG PARTNERS
FEBRUARY 2010
This is the second research paper in our series on analyst
recommendations. Our earlier work1 showed that:
• European analyst recommendations do outperform the market;
• Buy recommendations outperform more consistently than sell
recommendations; and,
• Ideas provided by GLG’s selected universe of research salespeople
at European brokers outperform the broad universe of all analyst
recommendations in Europe.
Our first paper showed how a basic investment strategy using buy
recommendations in Europe could generate performance that would
lie in the top quartile of UK mutual funds (unit trusts) with a Europe-
including-UK benchmark. The purpose of this piece is to show how to
further improve on this with a deeper understanding of the nature of
those recommendations.
In this paper, we focus on analyst disagreement. We show that a buy
recommendation from an analyst on a “consensus sell” stock is on
average enough to cause the stock to start to rise in value. Similarly, a
sell recommendation on a “consensus buy” stock can often stop it from
rising, although the effect is weaker.
We also demonstrate that recommendations from large, global brokerage
firms have more of an impact on stock prices than smaller brokerage
firms when they disagree with the consensus. This is especially
noticeable when they issue buy recommendations on “consensus sells”.
However, in general the large brokers are less likely than smaller brokers
to make a “brave call” (a buy on an underperforming “consensus sell”
stock, or a sell on an outperforming “consensus buy” stock).
As in our previous paper, we are using data from 2005-2009. We have
excluded earlier data because the environment for equity analysts
changed significantly after the introduction of a number of regulatory
changes in 2003-20042. However, unlike our previous research we are
not using our own database of trade ideas that brokers make specifically
to GLG (as we did previously) but data from the Detail History files in
the Thomson IBES database, which covers nearly all recommendations
made by analysts in Europe.
B uy recommendations
To determine whether an analyst is agreeing or disagreeing with the
consensus, we first need to define “consensus”. This is more difficult
than it sounds (there are many possible methods). We have chosen
a simple but practical approach by calculating a score based on the
number of buy recommendations less the number of sells, divided by the
total number of recommendations issued by brokers over the previous
6 month period3. We have then split stocks into four equal groups, from
most to least recommended. We term the extremes “most loved” and
“most disliked”.
(Note we found that the 6 month window was large enough to allow
a reasonable number of recommendations for each stock, but not so
large to include stale recommendations. We found that more complex
definitions using decay weightings made little difference).
We show the performance of buy recommendations in Exhibit 1. As in
our previous article, we show excess performance against the market,
using the DJ STOXX Large, Mid or Small cap index depending on the
market cap of the stock. Performance is set at zero on the close of
the day the recommendation is made4. We have shown performance
from 60 days prior to the recommendation out to 100 days after. We use
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STOXX 600 constituents only for this analysis. There are no adjustments
for transaction costs.
“Most loved” stocks are, on average, outperforming prior to
the recommendation announcement, while “most disliked” are
underperforming. But a buy recommendation immediately changes that.
Our analysis shows that all buy recommendations perform very similarly
over the 100 days after the recommendation is made, irrespective of the
previous consensus on the stock. In all cases the stock move on a buy
recommendation announcement day appears to be about the same, and
the subsequent performance following the buy recommendation is also
very similar.
We conclude that the consensus has little bearing upon the expected
impact of a new buy recommendation. A large impact from the
recommendation comes either on the day or on the days immediately
preceding the recommendation. However there’s still a significant
and steady return that takes place over the 100 days following the
recommendation.
As we discussed in our first article, there are three possible causes for the
impact we observe just prior to announcement day. First, we implement
the ideas at the close of the day the recommendation is issued. If the
idea is issued in the morning, the stock could rise during the day before
we implement our long position. Second, it is possible that the analysts
don’t immediately give their ideas to IBES. Third, analysts can often
issue recommendations shortly after other analysts, which mean that the
later analysts’ recommendations performance is influenced by others.
All of these factors likely account for the run-up just before time 0.
As a next step, we have separated brokerage firms into two groups: (1) the
nine largest, global brokers and (2) the remaining 400 or so smaller European
firms. Our split is purely judgmental, based on our view of the firms.
Exhibit 1: Buy recommendations have similar impact, whether made on
“most loved” or “most disliked” names
Stock price (adjusted for market move)
102.0
101.5
101.0
100.5
100.0
1 (Most Disliked) [18.0% of ideas]
99.5
2 [25.4% of ideas]
3 [28.7% of ideas]
99.0
4 (Most Loved) [27.8% of ideas]
98.5
Broker announces recommendation
98.0
-60 -40 -20 0 20 40 60 80 100
Trading Days from Recommendation Announcement
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Exhibit 2: Buy recommendations from global brokers perform similarly to
buy recommendations from smaller brokers
Stock price (adjusted for market move)
102.0
101.5
101.0
100.5
100.0
99.5
Large Brokers [31.4% of ideas]
99.0 Other Brokers [68.6% of ideas]
98.5
Broker announces recommendation
98.0
-60 -40 -20 0 20 40 60 80 100
Trading Days from Recommendation Announcement
When the large brokers issue a buy recommendation on a stock, there
is not a particularly noticeable difference to when a small broker issues
a buy recommendation. The impact around the recommendation date is
slightly larger5, but the subsequent 100 day performance is about the same.
However, as we show in the next section, there is a large difference when
the brokers disagree with the existing consensus.
We notice two differences between large and small brokers when they issue
anti-consensus buy recommendations:
1. Global brokers have more impact when they disagree. From the close
on the day they make the buy recommendation to 100 days after
the recommendation, the impact is about double compared to the
smaller brokers. Most of the performance difference occurs between
50 and 100 days after the recommendation was made. Clearly
large brokers speak to more clients than their smaller peers and
their actions also have a larger visibility within the market, so it’s not
surprising that they have a larger impact when they take a contrarian
view. It is also notable that the large brokers have more impact on
the day they announce their recommendation. Taking into account the
announcement day impact, the impact of a buy recommendation on
performance is meaningful from inception for large brokers when they
disagree with the consensus.
2. Global brokers are more reticent when placing a buy on a “most disliked”
stock. They wait, on average, for stock underperformance to stabilise
for around fifteen days before issuing the buy recommendation. The
smaller brokers appear to be more audacious. On average, they issue
buy recommendations on names that are falling harder. Large brokers
may feel they have more to lose by placing a buy recommendation on
a sharply falling stock, which may explain their relative reticence. They
may also recognise that momentum is a strong effect in equities, and
trying to fight it is often ill-advised. Small brokers, by contrast, may
think they gain more by making the brave call.
S ell recommendations
In general, brokers’ sell recommendations are less profitable than their buy
recommendations. While they have an effect on the day of recommendation
which is of similar strength to the buy recommendation, the performance of
the sell recommendation is weaker in the subsequent 100 days. However,
we do see meaningful differences by consensus level (Exhibit 4). “Most
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Exhibit 3: When large brokers issue buy recommendations on “most
disliked” stocks the impact is significantly greater than for
smaller brokers
Stock price (adjusted for market move)
103.0
102.5
102.0
101.5
101.0
100.5
100.0
Large Brokers [39.1% of ideas]
99.5
Other Brokers [70.9% of ideas]
99.0
98.5
Broker announces recommendation
98.0
-60 -40 -20 0 20 40 60 80 100
Trading Days from Recommendation Announcement
loved” names, which are performing very strongly, see their performance
rate decline significantly after a sell recommendation. “Most disliked” names
underperform modestly after a sell recommendation. Only in the case of
“most disliked” stocks does the stock actually underperform the market
over 100 days. Brokers are clearly better at buy ideas than sell ideas, a
conclusion which is consistent with the findings of our first research paper.
Sell recommendations issued by large brokers do differ from
those issued by small brokers (Exhibit 5). The large brokers’ sell
recommendations underperform for longer, and they underperform
more. That said, the overall performance of sell recommendations from
both groups is rather underwhelming, particularly compared to the
performance of buy recommendations. Large brokers are also notable
for waiting for a “most loved” stock to stop outperforming before they
issue a sell recommendation. As we noticed with anti-consensus buy
recommendations, the large brokers are less audacious and more
conscious of momentum than small brokers.
For sell recommendations on “most loved” stocks, the effects are
roughly analogous to buy recommendations:
1. Large brokers are more reticent than the smaller brokers and
generally don’t put sell recommendations on stocks which have
been outperforming strongly.
2. The impact of a large broker putting a sell recommendation on a
“most loved” stock, is, however, greater than a small broker doing
the same thing.
C
onclusions
We find that a buy recommendation from a large broker on a “most
disliked” name moves a stock significantly more than any other category
we have examined. When small brokers issue an anti-consensus buy,
the impact is still positive, but less so.
We have also found that buy recommendations are generally more
powerful than sell recommendations, although when brokers issue
sell recommendations on “most loved” names, you should at least
expect the pace of performance to slow down. However, reflecting the
difference in impact between the large and small brokers, a “brave sell”
recommendation from a smaller broker on a consensus buy name is not
usually enough to cause it to underperform.
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Exhibit 4: Sell recommendations perform best on “most disliked” stocks Exhibit 5: Sell recommendations from large brokers underperform more
than sell recommendations from small brokers

Stock price (adjusted for market move) Stock price (adjusted for market move)

102.0 102.0

101.5 101.5

101.0
101.0

100.5
100.5

100.0
100.0
99.5

99.5
99.0 1 (Most Disliked) [31.8% of ideas]
Large Brokers [33.5% of ideas]
2 [27.1% of ideas]
99.0
98.5 3 [24.8% of ideas] Other Brokers [66.5% of ideas]
4 (Most Loved) [16.3% of ideas]

98.0 98.5

Broker announces recommendation Broker announces recommendation

97.5 98.0
-60 -40 -20 0 20 40 60 80 100 -60 -40 -20 0 20 40 60 80 100

Trading Days from Recommendation Announcement Trading Days from Recommendation Announcement

Exhibit 6: Large brokers have more impact when they issue sell
References
recommendations on “most loved” stocks Harvey, Campbell R., Rattray, Sandy, Utans, Joachim and Mawji, Yasser,
2009, Do European Analysts Add Any Value? GLG Views September
2009 and unpublished working paper, Duke University.
Stock price (adjusted for market move)

102.0
Opinions expressed are those of the authors and may not be shared
101.5 by all personnel of the GLG group (“GLG”).

101.0 Information contained herein has been produced based on data that
is believed to be correct as at the date hereof, however, no warranty
100.5 or representation is given to this effect. Neither the authors nor GLG
shall be liable to any person for any action taken on the basis of the
100.0 information provided. Past performance of any investment strategy
described is not a reliable indicator of future results.
99.5
This document is for information purposes only and does not
99.0 constitute an offer or invitation to anyone to invest in any GLG funds
and has not been prepared in connection with any such offer.
Large Brokers [31.2% of ideas]
98.5
Other Brokers [68.8% of ideas]
98.0

97.5
Broker announces recommendation
97.0

-60 -40 -20 0 20 40 60 80 100

Trading Days from Recommendation Announcement

Footnotes:
1. See “Do European Brokers Add Any Value Through Recommendations?” by Harvey, Rattray, Utans and Mawji (September 2009), available on the GLG Views website.
2. The US Global Analyst Research Settlement of April 2003, the EU Market Abuse Directive of 2003, the EU’s Markets in Financial Instruments Directive of 2004 (MiFID) and the FSA’s rules stemming
from CP205 and implemented in July 2004 all targeted analyst conflicts of interest and the fairness of research.
3. We have defined a “buy” as recommendations that IBES has termed 1 (strong buy) or 2 (buy) and where the recommendation is more positive than previously for the analyst. Similarly a “sell” is a
recommendation classed as 4 (underperform) or 5 (sell) and more negative than previously for the analyst. We use recommendations newly issued within the period only, not reiterations of previously
existing recommendations which likely carry little information.
4. IBES takes one or two days typically to incorporate the idea into their database, so investors relying on IBES will be delayed compared to investors who receive research directly from the broker. We are
using the day IBES says the recommendation is made (“announcement date”), as opposed to when IBES actually delivers that information.
5. This is possibly attributable to the fact that big brokers may delay the release of data to IBES more than small brokers. Another factor may be that large brokers likely disseminate more widely and have
a greater “voice” in the market.

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