Mapping Equity Analyst Recommendations to a Five-Point Scale

Summary

The document explains how to normalize equity analyst recommendations that use different labels, such as buy, outperform, or overweight. It notes that despite differences in wording, these systems generally correspond to five recommendation levels, making a shared ordinal scale more suitable than a simple three-category mapping.

It points to the I/B/E/S convention, which numbers recommendations from strongest buy through strongest sell, and notes that academic studies have used this standardized data. This gives a practical starting point for coding historical analyst ratings across firms. However, the document does not provide a complete crosswalk for every analyst’s terminology, nor does it establish that labels are perfectly equivalent across providers or time. Researchers should verify individual rating definitions before assigning numeric values.

Key ideas

• Analyst recommendation systems often use different words for comparable rating levels.
• Many systems can be represented on a five-level ordinal scale.
• The I/B/E/S convention orders ratings from strongest buy to strongest sell.
• A standardized scale helps make historical recommendations easier to analyze.
• Provider-specific definitions may still require validation.

Tags

# How to assign equity analyst recommendations to a common, numeric scale?


# How to assign equity analyst recommendations to a common, numeric scale?












Yahoo finance conveniently provides historic ratings from a number of analysts. Unfortunately, each analyst seems to use a different scale: buy/hold/sell, perform/outperform/neutral, overweight/equal weight/underweight, etc.

I've already written a function to scrape this data into R, and I would like to expand it by automatically coding the ratings. I was thinking of using a -1,0,1 system, which would basically encode bad/neutral/good, and trying to shoehorn each analyst's system onto this scale.

I'm sure other people have solutions to this problem, and I'm interested to see what they are before I start working.

## Answer by Tal Fishman (score 2, accepted)

https://quant.stackexchange.com/a/2005

These are actually known as equity analyst recommendations, and although the terms differ, virtually all of them grade on a 5-point scale. Much academic research has been done using analyst recommendations, typically using the I/B/E/S database (see, e.g. Sorescu and Subrahmanyam (2006)).

> IBES distinguishes five categories of recommendations, labeled 1 through 5, which we interpret as “strong buy,” “buy,” “hold,” “sell,” and “strong sell,” respectively.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.