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Back in November, I mentioned a working paper by Ljungqvist, Malloy, and Marston titled Rewriting History. In it, they find evidence that the analyst recommendations and forecasts in the I/B/E/S analyst forecast database were altered after the fact in several ways:

• Alterations of levels of recommendations (i.e. changing a strong buy to a buy)
• Additions and deletions of records
• Anonymizing (i.e. removing the analyst names from recommendations)
  

Thomson subsequently attributed the changes to technical glitches and argued that the authors' results were merely due to their having used the wrong data tapes. Following Thomson's defense, the authors withdrew the paper.

Now it's back, with even more interesting results. The revisions they document have systematic patterns to them:

• Additions were far more likely to be of the "hold" or "sell" variety
• Deleted records were far more likely to be of "buy" or "strong buy" recommendations.
• Alterations were primarily seen on "buy" and "strong buy" recommendations, which were subsequently revised downward."
• Anonymization" of recommendations is more likely for bolder recommendations, for more senior analysts, and for those who had Institutional Investor "all star" status.
  
• Changes were more likely to be seen in the records of larger investment houses, whether measured by analyst staff or the size of their investment banking operations.
• Finally, changes pretty much never were seen for brokerage firms that subsequently ceased operations - only for those that survived.
  

As a whole, these changes make a "revised" brokerage firm's recommendation pattern appear less optimistic after the fact. The overall impact on optimism might not be that large, since only about a sixth of all stocks are affected in a given year. But for the affected stocks, it does make the recommendations appear significantly more conservative than they originally were (particularly in the latter part of the 1990s, when analyst optimism got a lot of scrutiny).

The paper also does some nice testing to see whether the changes affect the usefulness of analyst forecasts and recommendations for making trading strategies.

A good read, and recommended for anyone who uses I/B/E/S for research or trading purposes.

HT: Barry Ritholtz at The Big Picture (who, as usual, has a better title for his post than I do).

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