Assessing Performance of Morningstar's Star Rating System for Equity Investment

Posted: 7 Aug 2017

See all articles by Paul J. Bolster

Paul J. Bolster

Northeastern University - Finance and Insurance Area

Emery A. Trahan

Northeastern University, Finance Group

Pinshuo Wang

University of South Florida

Date Written: February 16, 2016

Abstract

Both institutional and individual investors have a vast array of advisory and ratings services to assist with security selection. One of the most prominent sources of stock ratings is Morningstar. This is the first large-scale study evaluating the performance of portfolios formed using Morningstar’s Star rating system for stocks. We evaluate the performance of portfolios formed using this rating system. Our results provide evidence that the Morningstar stock rating system allows an investor to build a portfolio with superior absolute and risk-adjusted returns over a long period of time. We show that a modest transaction cost will reduce, but not eliminate, these benefits. Overall, our results indicate that Morningstar ratings effectively discriminate between over- and undervalued stocks over the long term.

Keywords: Asset pricing, investment decisions, ratings and rating agencies, security analyst

JEL Classification: G240, G110, G120, G140

Suggested Citation

Bolster, Paul J. and Trahan, Emery A. and Wang, Pinshuo, Assessing Performance of Morningstar's Star Rating System for Equity Investment (February 16, 2016). Journal of Economic & Financial Studies, 2016; Northeastern U. D’Amore-McKim School of Business Research Paper No. 3013806. Available at SSRN: https://ssrn.com/abstract=3013806

Paul J. Bolster (Contact Author)

Northeastern University - Finance and Insurance Area ( email )

Boston, MA 02115
United States
617-373-5051 (Phone)
617-373-8798 (Fax)

Emery A. Trahan

Northeastern University, Finance Group ( email )

Boston, MA 02115
United States

Pinshuo Wang

University of South Florida ( email )

4202 East Fowler Avenue, BSN3129
Tampa, FL 33620
United States

HOME PAGE: http://sites.google.com/site/pinshuowang/

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