What factors motivate the analystsʹ stock recommendation in a small emerging market? Evidence from Sri Lanka

The purpose of this research is to determine the criteria used by the analysts for stock recommendation, identification of certain key factors which are useful for individual investors. According to the Modigliani-Miller theorem, the factors which affect dividend and capital gain could also influence investors. The regression analysis was used to identify the factors which influence the analystsʹ stock recommendations. The P/E ratio, dividend yield, return on equity and rate of retained profit are the financial indicators which affected analystsʹ advice. The market performance indicators of the return sort, volatility of shares have a significant impact on perfect investment decision. The emerging markets exhibit greater sensitivity to abnormal volume trading. However, we found that it is less sensitive to stock analystsʹ recommendation in emerging Colombo security exchange (CSE). The stock analystsʹ recommends more concern on firm dividend than capital gain. We fundamentally disagree with the argument of Modigliani-Miller theorem in terms of analystsʹ stock recommendation and individual investorʹs point of view. Behavior of individual investors in emerging CSE is preferred on low risk stable dividend than future capital gains.