Leonardo Madureira

Elusive anomalies in the Brazilian stock market

Abstract We study the twist-of-the-Monday effect in the Brazilian stock market and provide evidence that it is due to index construction problems, such as the nonsynchronous trading of stocks. The effect is present for indices but absent for most individual stocks and in the most recent subperiods of the 1986–1998 period. When present, it was due to negative weekend returns while Monday intraday returns were significantly positive. When absent, Monday returns remain positively correlated with the previous week return although Monday returns are no longer significantly negative. Monday trading strategies based on the previous week return were profitable in and out of the sample.

Banking Relationships and Sell-Side Research

This paper examines disclosures by sell-side analysts when their institution has a lending relationship with the firms being covered. Lending-affiliated analysts’ earnings forecasts are found to be more accurate relative to forecasts by other analysts but this differential accuracy manifests itself only after the advent of the loan. Despite this increased earnings forecast accuracy, lending-affiliated analysts exhibit undue optimism in their brokerage recommendations and forecasts of long term growth. The optimism exists both before and after the lending commences. The evidence suggests that any insights into the covered firm via the lending relationship are employed by bank analysts in a selective manner. They appear unwilling to compromise on disclosures where ex post accuracy is clearly revealed, possibly to preserve their own personal reputation. However, they are overly optimistic on other disclosures where resolution is less readily verifiable, possibly to promote their lending client’s financial standing.

What Are Analysts Really Good At

Sell-side analysts employ different benchmarks when defining their recommendations. A buy for some brokers means the stock is expected to outperform its industry, while for other brokers it means the stock is expected to outperform the market, or some return threshold. We show that these stated benchmarks have implications for the distribution of recommendations, price reactions to recommendations, and the investment value of recommendations. We conclude that, depending on the question, academics may need to account for the benchmarks when studying analysts’ outputs, and investors may find the benchmarks beneficial in interpreting analysts’ advice.Sell-side analysts employ different benchmarks when defining their stock recommendations. For example, a ‘buy’ for some brokers means the stock is expected to outperform its peers in the same sector (“sector benchmarkers”), while for other brokers it means the stock is expected to outperform the market (“market benchmarkers”), or just some absolute return (“total benchmarkers”). We explore the validity and implications of the adoption of these different benchmarks. Analysis of the relation between analysts’ recommendations and their long-term growth and earnings forecasts suggests that analysts indeed abide by their benchmarks: Sector benchmarkers rely less on across-industry information, and focus more on ranking firms within their industries. We also find evidence that market- and sector-benchmarkers are successful in meeting or beating their benchmark returns, while total-benchmarkers are not. However, we do not find much evidence that investors react differently to recommendations based on the different benchmarks. The research carries implications for the correct understanding and interpretation of sell-side research and its investment value.