Ratings Changes, Ratings Levels, And The Predictive Value Of Analysts' Recommendations

This paper provides evidence that the documented abnormal returns to analysts' security recommendations stem from both the ratings levels assigned as well as the changes in those ratings. Conditional on the sign and magnitude of a ratings change, the author find buy and strong buy recommendations to be associated with greater returns than are holds, sells, and strong sells. Conditional on the ratings level, upgrades earn the highest returns and downgrade the lowest. They also find that both ratings levels and changes predict future unexpected earnings as well as the associated market reaction.