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Most studies investigating the herding of financial analysts focused on the impact of analyst attributes on herding, while firm characteristics may also contribute significantly to herding. The primary objective of this study is to examine whether analyst recommendations prefer stocks with firm characteristics associated with future returns and demonstrate the so-called 'characteristic herding' behaviour. Thus, in this study, we incorporate within Welch's (2000) model those characteristics of firms relating to future returns; as a result, we find that 'characteristic herding' is discernible in the recommendations of financial analysts. This tendency towards herding in analyst recommendations increases with the firm size and book-to-price ratio of the stock. One of these two firm characteristics positively correlates with the future returns of stocks while the other displays a negative correlation. Consequently, the 'characteristic herding' of analysts is caused in part by recommendations made on account of stock fundamentals and in part by other reasons. This may dampen the impact of future returns on herding. It has also been observed that herding exists in the market regardless of bull market or bear market. No significant inferiority is reported in analyst performance with herding when compared to the performance without herding.
