Rating on a Behavioral Curve

59 Pages Posted: 21 Nov 2017 Last revised: 2 Dec 2023

See all articles by Utpal Bhattacharya

Utpal Bhattacharya

HKUST Business School

Janghoon Shon

UNSW Business School

Yu Zhang

Qube Research & Technologies

Multiple version iconThere are 2 versions of this paper

Date Written: 2023

Abstract

Sell-side analysts rate on a behavioral curve. 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 quality of the few other stocks they have rated recently. Even non-industry peers affect the ratings. We also find that this bias has price implications. The next day's alpha of a sophisticated trading strategy that incorporates this bias is about 43% higher compared to the alpha of an unsophisticated strategy that uses rating information only.

Keywords: reference dependence, relative rating, analyst recommendations, target price

JEL Classification: D91, G11, G14, G24, G40

Suggested Citation

Bhattacharya, Utpal and Shon, Janghoon and Zhang, Yu, Rating on a Behavioral Curve ( 2023). Available at SSRN: https://ssrn.com/abstract=3073877 or http://dx.doi.org/10.2139/ssrn.3073877

Utpal Bhattacharya (Contact Author)

HKUST Business School ( email )

Clear Water Bay
Kowloon
Hong Kong

Janghoon Shon

UNSW Business School ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia

Yu Zhang

Qube Research & Technologies ( email )

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