Ratings Changes, Ratings Levels, and the Predictive Value of Analysts' Recommendations

Financial Management, Forthcoming

37 Pages Posted: 24 Dec 2007 Last revised: 18 Sep 2009

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Brett Trueman

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: September 14, 2009

Abstract

We show that abnormal returns to analysts’ recommendations stem from both the ratings levels assigned as well as the changes in those ratings. Conditional on the ratings change, buy and strong buy recommendations have greater returns than do holds, sells, and strong sells. Conditional on the ratings level, upgrades earn the highest returns and downgrades the lowest. We also find that both ratings levels and changes predict future unexpected earnings and the associated market reaction. Our results imply that (a) investment returns may be enhanced by conditioning on both recommendation levels and changes, (b) the predictive power of analysts’ recommendations reflects, at least partially, analysts’ ability to generate valuable private information, and (c) some inconsistency exists between analysts’ ratings and the formal ratings definitions issued by securities firms.

Keywords: analysts, ratings, recommendations, changes, levels, returns

JEL Classification: G12, G14, G23, G24, G29, M41

Suggested Citation

Barber, Brad M. and Lehavy, Reuven and Trueman, Brett, Ratings Changes, Ratings Levels, and the Predictive Value of Analysts' Recommendations (September 14, 2009). Financial Management, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1077733

Brad M. Barber

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

Brett Trueman (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-4720 (Phone)
310-267-2193 (Fax)

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