Information Effects of Changes to Analysts’ Recommendations: Morningstar Star Ratings Changes for Stocks

We study the nature and impact of ratings changes for individual stocks provided to investors by Morningstar, Inc. Morningstar’s recommendations follow negative momentum for upgrades and positive momentum for downgrades. When ratings change, upgraded stocks experience positive abnormal returns, while downgraded stocks experience negative abnormal returns. Morningstar recommendations not only impact stock prices at announcement, but statistically significant abnormal returns occur over the following 30 trading days. Additional variables tracked by Morningstar, such as economic moat and uncertainty, explain variation in abnormal returns associated with ratings change announcements. Overall, the results suggest that Morningstar analysts provide valuable information to investors.