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Distribution of stock ratings and analyst recommendation revision

Author

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  • Chan, Chia-Ying
  • Lo, Huai-Chun
  • Su, Yi-Ru

Abstract

With the implementation of NASD Rule 2711 in 2002, each brokerage firm is now required to publicly disseminate the distribution of stock ratings in each research report. Hence, this paper investigates the relationship between the percentage of buy recommendations and probability of deciding to downgrade or drop coverage of stocks. Our findings suggest that the percentage of buy recommendations can enhance the probability of deciding to downgrade stock ratings and drop coverage of stocks. Furthermore, we find that analysts tend to revise their recommendations downward to hold instead of an unfavorable level. In addition, we find the market tends to heed downgrade decisions of analysts with a higher percentage of buy ratings. This finding is consistent with Barber, Lehavy, McNichols, and Trueman (2006) by applying data at the broker level.

Suggested Citation

  • Chan, Chia-Ying & Lo, Huai-Chun & Su, Yi-Ru, 2014. "Distribution of stock ratings and analyst recommendation revision," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 273-286.
    • Handle: RePEc:eee:ecofin:v:28:y:2014:i:c:p:273-286
    DOI: 10.1016/j.najef.2014.03.004
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    More about this item

    Keywords

    NASD Rule 2711; Distribution of stock ratings; Market reaction; Long term performance;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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