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Ratings Changes, Ratings Levels, and the Predictive Value of Analysts' Recommendations

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  • Brad M. Barber
  • Reuven Lehavy
  • Brett Trueman
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    Abstract

    "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." Copyright (c) 2010 Financial Management Association International.

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    Bibliographic Info

    Article provided by Financial Management Association International in its journal Financial Management.

    Volume (Year): 39 (2010)
    Issue (Month): 2 (06)
    Pages: 533-553

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    Handle: RePEc:bla:finmgt:v:39:y:2010:i:2:p:533-553

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    Cited by:
    1. Florian Esterer & David Schröder, 2014. "Implied cost of capital investment strategies: evidence from international stock markets," Annals of Finance, Springer, vol. 10(2), pages 171-195, May.
    2. Medovikov, Ivan, 2014. "Can Analysts Predict Rallies Better Than Crashes?," MPRA Paper 55942, University Library of Munich, Germany.
    3. Kadan, Ohad & Madureira, Leonardo & Wang, Rong & Zach, Tzachi, 2012. "Analysts' industry expertise," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 95-120.

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