Brokers’ Stock Ratings Distributions and the Returns from their Stock Recommendations: Evidence Post-NASD Rule2 711
Publication Type
Conference Paper
Publication Date
7-2013
Abstract
NASD 2711 requires brokers to disclose their overall ratings distribution and the percentage of their investment banking customers within each rating. Based on research reports of 50 large brokers between 2003 and 2011, we find an upward trend in the overall buy percentage (BUY percentage) and a decrease in the percentage of investment banking customers in the buy recommendations (IB percentage). Furthermore, the profitability of upgrade to buy (initiation as buy) recommendations is negatively (positively) associated with the disclosed IB (BUY) percentage, and IB (BUY) percentage is negatively (positively) associated with earnings forecast accuracy. Together, the evidence is consistent with a relatively high BUY percentage largely stemming from brokers’ selective coverage of better firms and the IB percentage mainly capturing the degree of optimistic bias in analysts’ recommendations. We also find evidence that investors do not fully understand the implications of these percentages.
Discipline
Accounting | Corporate Finance | Portfolio and Security Analysis
Research Areas
Financial Performance Analysis
Publication
Annual Conference on Pacific Basin Economics, Finance, Accounting, and Management
City or Country
Melbourne, Australia
Citation
CHEN, Chih-Ying and CHEN, Kun-Chih.
Brokers’ Stock Ratings Distributions and the Returns from their Stock Recommendations: Evidence Post-NASD Rule2 711. (2013). Annual Conference on Pacific Basin Economics, Finance, Accounting, and Management.
Available at: https://ink.library.smu.edu.sg/soa_research/1092