Can we trust financial analysts? Reliability of stock recommendations and firm-specific characteristics

We examine the reliability of analysts’ stock recommendations issued for Italian listed firms by exploring absolute stock returns. Research findings reveal that absolute stock returns following recommendations differ depending on whether they are positive, neutral or negative recommendations, but slightly more than fifty percent of recommendations are confirmed by absolute stock returns. On the basis of the logistic regression model, we also document that the reliability of stock recommendations is inversely connected to the uncertainty faced by investors who hold stocks in a specific firm, as suggested by the estimate of explanatory variables, such as the firm’s beta, the interest coverage ratio and cash flow volatility