Will Financial Analysts Mistake Stocks of Good Companies for Good Stocks? Evidence from Taiwan Stock Market

Abstract

It has been shown that the individual or institutional investors rely on the information provided by the financial analysts. A good stock recommended by financial experts is expected to make profit to the investors. However, due to the cognitive biases, the financial analysts or investors are probably confused in the firm characteristics between the good stocks and the stocks of good companies. Good companies are normally inferred to the company that have good managing and operating systems, however, it is usually though to have good returns as good stocks. The future earning forecasts of these good companies may be thus overestimated as compared with the others. Such cognitive biases probably results in improper investment and investment loss. In this study, the reputation survey results for the companies in Taiwan and the corresponding financial data are used to verify the proposed cognitive biases hypothesis. The empirical evidence in this study shows that financial analysts mistake stocks of good companies for good stocks. However, it is also shown that the average one-year buy-and-hold return of these sample firms (including good companies and good stocks) is still higher than that of the chosen matching firms.