In their paper "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations," Journal of Business Finance and Accounting, authors Mokoaleli-Mokoteli, Taffler, and Agarwal tests whether sell-side analysts are prone to behavioral errors when making stock recommendations, as well as the impact of their investment banking relationships on judgment. The authors find that new buy recommendations on average have no investment value, whereas new sell recommendations do have value, although it takes time for the information to be assimilated by the market. They also find that new buy recommendations are distinguished from new sells both by the level of analyst optimism and conflicts of interest (no surprise there). Of interest, successful new buy recommendations are characterized by lower prior returns, while successful new sells do not differ from their unsuccessful counterparts in terms of these measures.

Interesting research, and somewhat intuitive - or at least it should be. New buy recommendations involve selling, and sell recommendations involve selling, ......., just a different kind.

According to research by State Street Global Markets, fund managers in Europe are paying less attention to sell-side analysts than in the past (see Financial Times article). Data from Bloomberg also showed that the accuracy of earnings forecasts made by US sell-side analysts has fallen to its lowest level in over a decade, with analysts being accurate only 6.7 percent of the time. As for the sell-side analysis, State Street found that the pattern of analysts upgrades and downgrades matched institutional investment flows on just 2 of 11 sectors in Europe. For the other sectors, institutional investors were either withdrawing money despite analysts upgrades, or increasing their investments in sectors that were downgraded. As stated by Andrew Capon of State Street:

"The buy-side and the sell-side disagree to such extent that when fund managers receive recommendations they then tell their traders to do exactly the opposite. For many sectors there is a complete bifurcation between flows and sell-side earnings forecasts.”

Of course, if the crowd is now taking a contrarian view of analyst recommendations, should we begin to do the opposite and actually follow them? Maybe it is time to get the dart board back out. Then again, in this market the target keeps moving.