Changes in Recommendation Rating Systems, Analyst Optimism, and Investor Response

Yen Jung Tseng*, Mark Wilson

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


We study whether changes in analyst recommendation ratings systems encouraged by the implementation of NASD 2711 in 2002 are associated with improved objectivity and independence in analyst recommendations. Using recommendations issued during windows surrounding major investment banking events (M&A transactions, IPOs and SEOs), we show that reductions in analyst optimism following the reforms concentrate in the recommendations of analysts whose employer adopted a three-tier rating system at the time of the reforms, and that this effect is generally stronger for analysts whom the underlying incentives to engage in unethical behaviour is greatest. We also find evidence that adoption of the three-tier system improved the market’s perception of the objectivity of analyst recommendations issued after SEOs, and that for hold and sell-type recommendations this effect was stronger for analysts subject to the greatest potential ethical conflicts. While we find some evidence of a general post-reform increase in the profitability of recommendations issued following equity transactions, this improvement was only conditioned by changes to the rating system in our IPO sample.

Original languageEnglish
Pages (from-to)369-401
Number of pages33
JournalJournal of Business Ethics
Issue number2
Publication statusPublished - 1 Oct 2020

Bibliographical note

Publisher Copyright:
© 2019, Springer Nature B.V.


  • Analyst conflicts of interest
  • Analyst optimism
  • Analyst regulation

Cite this