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

52 Pages Posted: 17 May 2006

See all articles by Brad M. Barber

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

Multiple version iconThere are 3 versions of this paper

Date Written: September 2005

Abstract

This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can be used to predict the profitability of analysts' recommendations. Consistent with prior work, we find that the percentage of buy recommendations increased substantially from 1996-2000. Starting in mid-2000, however, the percentage of buys 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. Notably, over our sample period the difference between the percentage of buy recommendations of the large investment banks singled out for sanction in the Global Research Analyst Settlement and that of the non-sanctioned brokers is economically quite small.

Additionally, we 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. Further, 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: accounting, investment banks, stock ratings, profitability

JEL Classification: G29, G23, G24, G38, K22

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=902064 or http://dx.doi.org/10.2139/ssrn.902064

Brad M. Barber (Contact Author)

University of California, Davis ( email )

Graduate School of Management
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Davis, CA 95616
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Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
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734-936-0282 (Fax)

Maureen F. McNichols

Stanford University ( email )

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Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

Brett Trueman

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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