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|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|17280||2006||31 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Accounting and Economics, Volume 41, Issues 1–2, April 2006, Pages 87–117
This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can predict the profitability of analysts’ recommendations. We document that the percentage of buys decreased steadily starting in mid-2000, likely due, at least partly, to the implementation of NASD Rule 2711, requiring the public dissemination of ratings distributions. Additionally, we find that a broker's ratings distribution can predict recommendation profitability. Upgrades to buy (downgrades to hold or sell) issued by brokers with the smallest percentage of buy recommendations significantly outperformed (underperformed) those of brokers with the greatest percentage of buys.
This paper analyzes the distribution of stock ratings at investment banks and brokerage firms and examines whether these distributions can be used to predict the profitability of analysts’ stock recommendations. Our study comes at a time of increased scrutiny by Congress and securities regulators of potential analyst conflicts of interest. With the percentage of buy recommendations reaching 74 percent of total outstanding recommendations by mid-2000 and the percentage of sell recommendations falling to 2 percent, allegations arose that analysts’ recommendations did not reflect their true beliefs. Rather, it was contended that, among other things, the recommendations were intended to attract and retain investment banking business. The steep stock market decline during 2000–2002, whose beginning coincided with peak bullishness on Wall Street, only served to fuel the concerns of regulators and politicians. As part of its attempt to more closely regulate the provision of research on Wall Street, the National Association of Securities Dealers (NASD) proposed Rule 2711, Research Analysts and Research Reports, in early 2002. Around the same time, and with the same goal in mind, the New York Stock Exchange (NYSE) proposed a modification to its Rule 472, Communications with the Public. The Securities and Exchange Commission (SEC) approved these proposals on May 8, 2002. Among their provisions, these rules require all analyst research reports to display the percentage of the issuing firm's recommendations that are buys, holds, and sells. 1 This disclosure requirement was intended to provide investors with information useful in evaluating the quality of brokerage firms’ recommendations. Announcing the approval of NASD 2711, the SEC stated in its press release of May 8, 2002, that “These disclosures [regarding brokerage firms’ ratings] will assist investors in deciding what value to place on a securities firm's ratings and provide them with better information to assess its research.” This objective was echoed in a speech by Mary Schapiro, President, NASD Regulation, to the 2002 SIA Research and Regulation Conference on April 9, 2002, where she remarked that “While there may be good reasons why a firm has assigned a buy or strong buy to 80 percent of the companies it covers, investors have a right to know this information. It suggests a bias in the firm's coverage that investors should take into account in evaluating ratings… Our proposal [NASD 2711] would require firms to disclose this information.” In addition to providing investors with useful information, the new disclosure requirement was presumably also meant to implicitly pressure those brokers (and their analysts) who were consistently issuing a relatively high percentage of buy recommendations to adopt a more balanced ratings distribution. The regulatory and political focus on brokers’ stock ratings distributions and the subsequent requirement that these distributions be disclosed invite a number of interesting questions. First, did the 10 large investment banks sanctioned for alleged analyst conflicts of interest by the SEC in the 2003 Global Research Analyst Settlement issue the most favorable recommendations? Second, does a greater proclivity towards issuing buy recommendations imply that a brokerage firm's recommendations have less investment value? Alternatively stated, would knowledge of a broker's ratings distribution be useful in predicting the performance of its recommendations? Third, has NASD 2711 affected either the distribution of buys, holds, and sells or the predictive value of brokers’ ratings distributions? To address these and other questions, our analysis employs the First Call database, which contains over 438,000 recommendations issued on more than 12,000 firms by 463 investment banks and brokerage firms during the 1996–June 2003 time frame. We begin by documenting changes in the distribution of stock ratings over time. Consistent with Barber et al. (2003), we find that the percentage of buy (including strong buy) recommendations issued by investment banks and brokers increased markedly during the first part of our sample period. 2 Standing at 60 percent of all outstanding recommendations at the end of the first quarter of 1996, buy recommendations peaked at 74 percent of the total at the end of the second quarter of 2000. Over the same period, sell (including strong sell) recommendations declined from 4 to 2 percent, while holds went from 36 to 24 percent. From that point, the number of buys decreased steadily, standing at 42 percent of the total at the end of June 2003. The number of sells increased sharply, to 17 percent, while the number of holds increased to 41 percent. Among possible explanations for this reversal is the contemporaneous softening in economic conditions and sharp stock market decline, which might have negatively affected analysts’ expectations for future firm performance. This could not fully explain the reversal, however, since analysts’ ratings continued to deteriorate even as the economy and the stock market began their recoveries. Another potential explanation is the implicit pressure which the implementation of NASD Rule 2711 exerted on brokers. Consistent with this possibility, the reduction in percentage buys is most pronounced in the last half of 2002, which coincided with the implementation of this new rule. During that time buy recommendations decreased from 60 to 45 percent, while sell recommendations rose from 5 to 14 percent and holds went from 35 to 41 percent. We also partition the recommendations in our sample into those issued by the 10 sanctioned banks and those of the non-sanctioned brokers. In contrast to what might have been expected, the difference between the percentage of buys for these two groups of brokers prior to the implementation of NASD 2711 is economically quite small, averaging only 1.7 percentage points. Apparently, the proclivity to issue buy recommendations during that time was not limited to the sanctioned investment banks. Furthermore, in the period subsequent to NASD 2711's implementation the percentage buys for the sanctioned banks declined much more sharply than that of the non-sanctioned brokers. As of June 2003, buys constituted only 32.3 percent of the sanctioned banks’ outstanding recommendations; the corresponding figure for the non-sanctioned brokers was 45.7 percent. We next consider whether a link exists between a broker's stock ratings distribution and the future profitability of its recommendations. Theoretically, a relation should exist as long as: (i) recommendations, in general, have investment value (a notion that has been empirically supported by Barber et al., 2001 and Barber et al., 2003, Jegadeesh et al. (2004), Stickel (1995), and Womack (1996), among others); (ii) the information implicit in analysts’ recommendations and in brokers’ ratings distributions is not instantaneously incorporated into market prices; and (iii) the criteria used to classify recommendations into buy, hold, and sell differ across brokers. Empirical evidence to-date strongly suggests that market prices do react slowly to the information contained in recommendations (see, for example, Barber et al., 2001; Brav and Lehavy, 2003; Stickel, 1995; Womack, 1996). The difficulty and costliness of compiling brokers’ ratings distributions over most of our sample period (prior to the implementation of NASD 2711) suggest that this information, too, may not have been immediately incorporated into stock prices. Even for investors with access to these ratings distributions, limits to arbitrage may prevent them from fully and instantaneously capitalizing on their information. Among the factors limiting arbitrage are capital constraints, transactions costs (especially for smaller firms), and idiosyncratic risks associated with taking large, concentrated positions.3 (See Shleifer and Vishny (1997) and Pontiff (1996) for a general discussion of constraints on arbitrage.) Ratings criteria may differ across brokers for one of (at least) two reasons. First, some brokers might have a tendency to issue buy recommendations when a hold or sell is deserved (as has been alleged by some), while other brokers would be more forthcoming in their ratings. Second (and more innocuously), the definitions of buy, hold, and sell may differ across brokers. Regardless of the cause, these differences would imply that, all else equal, the buy recommendations of brokers with a smaller percentage of such ratings should outperform those of brokers who issue buys more frequently. It would also imply that the hold and sell recommendations of brokers who issue such recommendations less often would outperform (experience a greater decline than) those of brokers who issue them more frequently. The link between ratings distributions and recommendation returns is empirically examined by first calculating, for each quarter, the percentage of each broker's end-of-quarter outstanding recommendations that are buys. Brokers are then partitioned into quintiles based on this percentage. On average, the firms in the top quintile (descriptively labeled the “least favorable” brokerage firms) issued only 45 percent buys, while the firms in the bottom quintile (descriptively labeled the “most favorable” brokers) gave 79 percent buys. We then compute the average buy-and-hold abnormal return to each quintile's subsequent recommendation upgrades and downgrades. Consistent with our conjectures, we find that upgrades to buy from the least favorable brokers significantly outperformed those of the most favorable brokers, by an average of 50 basis points per month. Further, the downgrades to hold or sell of the most favorable brokers significantly outperformed (experienced a steeper decline than) those of the least favorable brokers, by an average of 46 basis points per month. These results suggest that there are, indeed, persistent differences across brokers in their tendency to issue buy recommendations and that the distribution of each brokers’ stock ratings would have been useful information for investors to possess during this time period. These differences become statistically insignificant, however, in the quarters after the implementation of NASD 2711. Though drawing strong inferences from such a short time series is difficult, these results suggest that the new rules may have tempered the proclivity of some brokers toward issuing buy recommendations. From the perspective of regulators, then, NASD 2711 may have had its intended effect. Our paper makes a contribution to the literature by being the first to examine: (i) the evolution of brokers’ stock ratings distributions over time, up through the recent bear market; (ii) the value of these distributions for predicting the profitability of future recommendations; and (iii) the impact of NASD 2711 on the nature of these ratings distributions and their predictive value. Moreover, by documenting the sharp change in these distributions post-NASD 2711, our work alerts researchers to the importance of including this more recent period in any future analysis of analysts’ recommendations. Our paper fits in with a number of recent studies that have examined the interaction between investment banking activities and various facets of analysts’ earnings forecasts and stock recommendations. Generally in this literature, banking activity has not been found to be associated with either less accurate or more optimistic earnings forecasts (see, for example, Lin and McNichols, 1998; Jacob et al., 1999; Kolasinski and Kothari, 2004; Agrawal and Chen, 2004; Cowen et al., 2003). However, Lin and McNichols (1998) and Dechow et al. (2000) document that long-term growth forecasts for firms with recent equity offerings are more optimistic when coming from analysts at lead underwriters than when issued by other analysts.4Iskoz (2003) and Lin and McNichols (1998) compare the performance of recommendations issued by analysts at lead investment banks to the performance of other analysts’ recommendations, for firms with recent share offerings. They find no significant difference in returns for either the buy or the hold and sell recommendations.5 In contrast, Michaely and Womack (1999) document for initial public offerings during the 1990–1991 period that the average 2-year performance of lead underwriter recommendations is significantly lower than that of other analysts. Barber et al. (2005) compare the performance of the recommendations of analysts at investment banks with those of analysts at independent research firms. They find that the buy recommendations of independent research firms outperform those of investment banks, especially subsequent to equity offerings. The plan of this paper is as follows. In Section 1 we give an overview of NASD Rule 2711 and in Section 2 provide a description of the data. Section 3 empirically examines a number of aspects of brokers’ ratings distributions. This is followed in Section 4 by a theoretical discussion of the link between a broker's stock ratings distribution and the subsequent performance of its recommendations. Section 5 explores this link empirically. Finally, summary and conclusions are presented in Section 6.
نتیجه گیری انگلیسی
With the heightened regulatory scrutiny of security analysts as a backdrop, this paper analyzes the distribution of brokers’ stock ratings across buys, holds, and sells. Our analysis also sheds light on the effect that NASD Rule 2711 has had on the observed tendency of analysts to issue many more buy than sell recommendations. Consistent with Barber et al. (2003) , we find that the percentage of buy recommendations increased substantially from 1996 to 2000, at one point exceeding the number of sell ratings by a ratio of more than 35:1. Notably, the difference between the percentage of buy recommendations of the large investment banks singled out for sanction in the Global Research Analyst Settlement and the buy recommendation percentage of the non- sanctioned brokers is economically quite small during the pre-NASD 2711 period. From the middle of 2000 the percentage of buys in our sample decreased steadily; by the end of June 2003, buys exceeded sells by less than a 3:1 ratio. This decrease probably was due, in part, to a worsening economy and a declining stock market. However, our findings strongly suggest that the implementation of NASD Rule 2711, which made brokers’ ratings distributions public, also played an important role. Subsequent to NASD 2711’simplementation, the percentage of buy recommendations decreased from 60 to 45 percent, while the percentage of sells rose from 5 to 14 percent. We also investigate whether the distribution of a broker’s stock ratings can predict the profitability of its future recommendations. Theoretically, it should have predictive power as long as: (i) recommendations, in general, have investment value; (ii) market prices do not instantaneously incorporate the information implicit in analysts’ recommendations and in brokers’ ratings distributions; and (iii) the implicit and/or explicit criteria used to classify recommendations into buys, holds, and sells differ across brokers. The buy recommendations of those brokers who are less inclined to issue buys should outperform those who more readily give them, while their sell recommendations should underperform. Consistent with these conjectures, the upgrades to buy of the brokers issuing the smallest percentage of buy recommendations significantly outperform those of the brokers with the greatest percentage of such recommendations, by an average of 50 basis points per month. Conversely, the downgrades to hold or sell of those issuing the fewest buy recommenda- tions significantly underperform those of the brokers issuing the most such recommenda- tions, by an average of 46 basis points per month. These results suggest that the disclosure of brokers’ stock rating distributions, as required by the new rules, would have helped investors in their evaluation of analysts’ research reports during this time period. Interestingly, these differences diminish in magnitude and lose their significance in the quarters after the implementation of these regulations. While care must be taken in drawing strong inferences from just a few quarters, this is additional evidence that the new rules have had an effect in disciplining those brokers who tended to issue more buy recommendations than others. This is good news for those who view this as an important goal of these new regulations.