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Rating on a Behavioral Curve

This paper finds that ratings of sell-side analysts are negatively affected by the quality of the other stocks they have rated recently, even if those stocks are not in the same industry. As the influence of same-industry peers appears only after the disclosure pressure brought about by Global Settlement, but the influence of other-industry peers has always existed, this reference bias seems to have a strong behavioral component. We also document a price implication: the average difference between cumulative abnormal returns of “Strong Buy” stocks and "Hold/Underperform/Sell” stocks is 4.3%; the average difference between cumulative abnormal returns of “Strong Buy” stocks of analysts with strong quality pools and “Hold/Underperform/Sell” stocks of analysts with weak quality pools is 6.1%, which is 42% greater.