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
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: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Can Investors Profit from the Prophets? Consensus Analyst Recommendations and Stock Returns
By Brad M. Barber, Reuven Lehavy, ...
-
Security Analysts' Career Concerns and Herding of Earnings Forecasts
By Jeffrey D. Kubik, Amit Solomon, ...
-
By Patricia Dechow, Amy P. Hutton, ...
-
Analyzing the Analysts: When Do Recommendations Add Value?
By Narasimhan Jegadeesh, Joonghyuk Kim, ...
-
An Empirical Analysis of Analysts' Target Prices: Short Term Informativeness and Long Term Dynamics
By Alon Brav and Reuven Lehavy
-
How Do Analysts Use Their Earnings Forecasts in Generating Stock Recommendations?