Broker recommendations and Australian small-cap equity fund management

This study examines whether the abnormal performance of active Australian small-cap equity fund managers is associated with broker recommendations. Our evidence supports the investment value of broker recommendations, showing significant abnormal returns (ARs) both pre- and post-broker recommendations. We find that when a factor-mimicking portfolio based on broker recommendations is added to a Carhart (1997) model, annual alphas are reduced by 48 basis points. Using transaction-level data, buy trades following broker recommendations earn significant cumulative ARs of 1.56 per cent after 60days. Overall, we find that broker recommendations account for an economically significant component of alphas.