Vice or Advice? Profits from Brokerage-Firm Trading Around Recommendation Revision Dates

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Abstract
We devise a new profitability metric that is robust to the dating and investability problems that frequently plague recommendations. Using this metric applied to ten years of detailed trading data from Sweden, we document the existence of abnormal profits to recommending brokers' net trades around positive recommendation revision dates, showing that either the broker or its clients actually benefit from the information contained in recommendations. Notably, a sizeable part of these abnormal profits comes from transactions that take place before the recorded recommendation date. This finding, together with evidence of substantial disparities between profitability and returns of liquidity-sorted portfolios of recommendations, suggests that methods that do not address the aforementioned problems may give a misleading view of recommendations' value. Statistically, we cannot establish that brokerage clients earn as positive profits from trading in negative recommendations as they do for positive in our sample. Economically, the combined magnitude of profits appear small in comparison to the size of the industry.

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