Is the Predictive Value of Analysts' Recommendations in Decline?: New Evidence from the U.S. Stock Market

Abstract

Using 719,830 analyst recommendations from 1994 to 2017, we construct various portfolios based on levels and changes in analyst recommendations and examine how the value of those recommendations in predicting the abnormal stock returns has changed over time. We find that the predictive value of recommendations has been declining, especially after the implementation of NASD Rule 2711. More importantly, this decline in the predictive value results from the loss of its value in buy- and upgrade-related recommendations while sell- and downgrade-related ones are still associated with the negative abnormal returns. We also find a stronger relation between recommendations and stock returns in the post-Rule period. Our empirical results show that, in terms of stock returns, the Rule 2711 has mitigated the analysts’ conflicts of interest in stock recommendations.

Keywords: analyst recommendations; stock returns; market efficiency; NASD Rule 2711

JEL Classification: G11, G12, G14