Abstract

https://ssrn.com/abstract=495882
 
 

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Citations (59)



 


 



Buys, Holds, and Sells: The Distribution of Investment Banks' Stock Ratings and the Implications for the Profitability of Analysts' Recommendations


Brad M. Barber


University of California, Davis

Reuven Lehavy


University of Michigan, Stephen M. Ross School of Business

Maureen F. McNichols


Stanford University

Brett Trueman


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

September 2005


Abstract:     
This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines their relation to the profitability of analysts' recommendations. Consistent with prior work, we find that the percentage of buy recommendations increased substantially from 1996-2000. Notably, though, the largest brokers, who have received the most scrutiny from regulators and the media, generally have a smaller percentage of buy recommendations than our sample as a whole. Starting in mid-2000 the percentage of buys has decreased steadily. Our analysis strongly suggests that this is due, at least in part, to the implementation of NASD Rule 2711, which requires brokers' ratings distributions to be made public. We also find that a broker's stock ratings distribution can predict the profitability of its recommendations. Upgrades to buy issued by brokers with the smallest percentage of buy recommendations significantly outperformed those of brokers with the greatest percentage of buys, by an average of 50 basis points per month. Conversely, downgrades to hold or sell coming from brokers issuing the most buy recommendations significantly outperformed those of brokers issuing the fewest, by an average of 46 basis points per month.

Number of Pages in PDF File: 52

Keywords: Analyst, investment bank, broker, stock ratings, recommendations, NASD 2711

JEL Classification: G12, G14, G29, G24


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Date posted: February 6, 2004  

Suggested Citation

Barber, Brad M. and Lehavy, Reuven and McNichols, Maureen F. and Trueman, Brett, Buys, Holds, and Sells: The Distribution of Investment Banks' Stock Ratings and the Implications for the Profitability of Analysts' Recommendations (September 2005). Available at SSRN: https://ssrn.com/abstract=495882 or http://dx.doi.org/10.2139/ssrn.495882

Contact Information

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)

Maureen F. McNichols
Stanford University ( email )
655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)
650-725-7979 (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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