Are Analysts' Stock Recommendations Really Relative to the Market?

The skewness in security analysts' recommendations is well documented, and is generally attributed to analysts' need to maintain good relations with the companies they follow. I examine another possible explanation — that analysts do not really rate stocks relative to the market, but incorporate overall market performance. Unlike other explanations for the skewness, this one implies there will be shifts in the recommendation distribution over time as market conditions change. I find that the shifts in the distribution during 1984–1992 are related to lagged market returns. Analysts moved toward more positive recommendations following months with poor market returns, and turned more negative following strong returns, suggesting analysts were betting on returns reversals. This effect was not observed during 1992–1999. However, the recommendation distribution shifted steadily toward buys during this period of overwhelmingly positive market returns. The results suggest that lagged market returns affect analysts' recommendation distributions. I document, however, that the recommendation distribution is not a useful market timing tool.