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Rating on a behavioral curve

Author

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  • Bhattacharya, Utpal
  • Shon, Janghoon
  • Zhang, Yu

Abstract

Sell-side analysts rate on a particular type of behavioral curve: recency. Although they claim to use objective criteria (like expected raw, market-adjusted, or industry-adjusted returns), we find that, even after controlling for these claims, their recommendations on a particular stock are negatively influenced by their assessment of the quality of the few other stocks they have rated that month. This recency bias has price implications. The next day's alpha of a sophisticated trading strategy that incorporates this bias is about 40 % higher compared to the alpha of an unsophisticated strategy that uses rating information only.

Suggested Citation

  • Bhattacharya, Utpal & Shon, Janghoon & Zhang, Yu, 2025. "Rating on a behavioral curve," Journal of Corporate Finance, Elsevier, vol. 91(C).
    • Handle: RePEc:eee:corfin:v:91:y:2025:i:c:s0929119924001706
    DOI: 10.1016/j.jcorpfin.2024.102708
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    More about this item

    Keywords

    Reference dependence; Relative rating; Analyst recommendations; Target price;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • 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
    • G40 - Financial Economics - - Behavioral Finance - - - General

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