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

Posted: 1 Mar 2006  

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

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Abstract

This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can predict the profitability of analysts' recommendations. We document that the percentage of buys decreased steadily starting in mid-2000, likely due, at least in part, to the implementation of NASD Rule 2711, requiring the public dissemination of ratings distributions. Additionally, we find that a broker's ratings distribution can predict recommendation profitability. Upgrades to buy (downgrades to hold or sell) issued by brokers with the smallest percentage of buy recommendations significantly outperformed (underperformed) those of brokers with the greatest percentage of buys.

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

JEL Classification: G12, G14, G29, G24

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. Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=813444

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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