Abstract
The authors examine Morningstar information changes stemming from changes in their 5-Star stock-rating system. Converse to many studies of other second-hand information effects, Morningstar rating changes lead to abnormal returns (ARs) that persist for 30 days subsequent to the information release. This information may be used to derive alpha-generating trading strategies. Statistically significant positive ARs persist for 30 days postannouncement for upgrades to 4 and 5 stars, while significant negative ARs persist for 30 days postannouncement for upgrades to 2 and 3 stars and for downgrades to 4, 3, 2, or 1 star. Traders can use this information to devise long, short, and long–short trading strategies. Morningstar’s analysis has high credibility, particularly with retail investors. Morningstar changes a stock’s rating when the price of the stock moves farther from the intrinsic value estimate derived by Morningstar’s model, suggesting that its analysis of the current stock price relative to intrinsic value and the timing of the rating change provide some relevant information to the market.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
