Buys, Holds, and Sells: The Distribution of Investment Banks' Stock Ratings and the Implications for the Profitability of Analysts' Recommendations
52 Pages Posted: 6 Feb 2004
Date Written: September 2005
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.
Keywords: Analyst, investment bank, broker, stock ratings, recommendations, NASD 2711
JEL Classification: G12, G14, G29, G24
Suggested Citation: Suggested Citation