Rating on a Curve

We document that if an analyst is covering a strong pool, the best firm is rated less highly than it would be otherwise, and if the analyst is covering a weak pool, the worst firm is rated less badly than it would be otherwise. These relative ratings affect dispersion in recommendations. Blindly following recommendations (long strong buy, short hold and sells) would generate returns of 39 bps per month, but going long strong buys from analysts with the best pools and shorting the holds and sells of analysts with the worst pools would yield 74 bps per month – nearly double!