Financial Analysts and their Contribution to the Information Efficiency of Capital Markets

Dissertation project by Dr. Hannes Wilke

Stock analysts appear on capital markets as central information intermediaries. They gather public and non-public information, condensing them into buy-sell-hold recommendations, target price estimates, and forecasts of various company key measures (for example, earnings per share or net income). Economic theory suggests that stock analysts, drawing on their expert knowledge and their exclusive access to insider information, help reduce information asymmetries between management and investor comunity and adopt the role of leading and supporting the development of expectations on capital markets. In contrast, the question whether stock prices follow analyst forecasts or vice versa remains controversial in current empirical literature.

The aim of this research project is to examine the complex dynamic relationship between analyst forecasts and stock prices on an empirical basis. The focus lies on uncovering the short and long term relation between the stock analysts` process of expectation building and the price process on capital markets. Based on these findings the intent remains to evaluate, whether and to what degree stock analysts are capable to match their goals and lead stock markets by their forecasts. Finally, a forecast-based investment strategy within a highly liquid stock universe shall prove whether or not potential informational edges of the analyst side can be transformed into profitable trading strategies which are applicable to investors.