An empirical evaluation of the effectiveness of South African investment analysts

Abstract

Investment and financial analysts are paid by society to seek information relevant to the valuation of listed companies. If they are performing their function correctly then, in a competitive environment, their actions will result in correctly and fairly priced securities. In this article evidence is presented that shows that South African analysts are not fulfilling this important task. In particular, evidence is presented that indicates that South African analysts are not equally adept at anticipating superior earnings performance and poor earnings performance. In general, they appear to be unduly pessimistic with regard to poorly performing companies. The result is that these companies, on average, show a marked decline in abnormal returns during the year followed by an upward reaction during the week of their preliminary announcement. As far as companies with superior earnings performance are concerned, analysts demonstrate no anticipatory ability whatsoever with the result that the only reaction observed is in the week of announcement. These results are contrasted with similar results from the NYSE clearly demonstrating that South African analysts are less perceptive than their American counterparts.