Value of analysts’ consensus recommendations and investor sentiment

This is an accepted manuscript of an article published by Taylor & Francis in Journal of Behavioral Finance on July 2013, available online: http://dx.doi.org/10.1080/15427560.2013.819805This paper studies the effect of investor sentiment on analysts' consensus recommendations. Our results show that the optimistic bias of analysts in the issuing of recommendations is affected by investor sentiment: the greater the investor sentiment, the more optimistically biased the analysts’ consensus recommendations. This bias is larger in stocks whose characteristics make them hard to value or to arbitrage. We also show that investor sentiment can help in the design of profitable strategies, particularly when taking the short position in portfolios with high sentiment sensitivity stocks.This paper has received financial support from the Spanish Ministry of Science and Innovation (ECO2009-12819)