Posted: 1 Mar 2006
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: 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
By John Graham