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Ratings Changes, Ratings Levels, and the Predictive Value of Analysts’ Recommendations
Author(s) -
Barber Brad M.,
Lehavy Reuven,
Trueman Brett
Publication year - 2010
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2010.01083.x
Subject(s) - predictive power , earnings , value (mathematics) , actuarial science , investment (military) , business , private information retrieval , economics , financial economics , econometrics , accounting , statistics , mathematics , philosophy , epistemology , politics , political science , law
We show that abnormal returns to analysts’ recommendations stem from both the ratings levels assigned and the changes in those ratings. Conditional on the ratings change, buy and strong buy recommendations have greater returns than do holds, sells, and strong sells. Conditional on the ratings level, upgrades earn the highest returns and downgrades the lowest. We also find that both ratings levels and changes predict future unexpected earnings and the associated market reaction. Our results imply that 1) investment returns may be enhanced by conditioning on both recommendation levels and changes; 2) the predictive power of analysts’ recommendations reflects, at least partially, analysts’ ability to generate valuable private information; and 3) some inconsistency exists between analysts’ ratings and the formal ratings definitions issued by securities firms.