Analyst Back Dating Scandal: A Non-Random Walk through IBES analyst ratings

Blame the professors: Just as the option backdating scandal started with academic researchers noting mathematical anomalies, so too might the next brewing scandal: the I/B/E/S Analyst ratings back dating scandal.

According to a Barron’s article by Bill Alpert (buried on page 39), several professors have discovered what they describe as 54,729 non-random, ex-post changes out of 280,463 observations — a little over 19.5% of analyst recs (abstract below):

"The professors found
almost 55,000 changes that had been made in the I/B/E/S database of
stock-analyst recommendations maintained by Thomson, the Stamford,
Conn., firm that is a leading vendor of financial data. The alterations
made Wall Street’s record of recommendations look more conservative —
hiding Strong Buy recommendations and adding Sell recommendations from
1993 to 2002. That is a period for which Wall Street has drawn heat and
government sanctions for touting Internet bubble stocks.

As a result of the changes, the stock picks shown in
the database would have created annual gains that were 15% to 42%
better than the originally recorded recommendations, using a trading
strategy based on analysts’ recommendations."

The firms were the most significant participants in the data backdating were also the firms who had the closest relationship between banking and research and were the hardest hit by the Spitzer enforced settlement.

From page four of the academic working paper notes exactly how significant this was:

"Why do the historical data now look different than they once did? The contents of the database changed at some point between September 2002 and May 2004, a period that not only coincided with close scrutiny of Wall Street research by regulators, Congress, and the courts, but also saw a substantial downsizing of research departments at most major brokerage firms in the U.S.

The paper outlines four types of data changes: 1) non-random removal of analyst names from historic recommendations (€œanonymizations€); 2) the addition of new records not previously part of the database; 3) the removal of records that had been in the data; and 4) alterations to historical recommendation levels.

The net result of this was to make many specific trading strategies appear better in retrospect than they actually were.  Buying top rated stocks and shorting lowest rated stocks, based on the changed data, now perform 15.9% to 42.4% better on the 2004 revised data than on the 2002 tape, the professors state.

Further, the profs observe the career paths of many analyst recs: "Analysts
whose track records are affected are associated with more favorable
career outcomes over the 2003-2005 period than their track records and
abilities would otherwise warrant."

to communication received from Thomson Financial (the owner of I/B/E/S)
in November and December 2006, the anonymizations were caused by a
series of software glitches, introduced in 2002-2003.1 Surprisingly,
despite the seemingly random nature of this type of shock to the data,
the resulting patterns have apparently systematic components, rather
than appearing random. For instance, bolder recommendations are more
likely to be anonymized, as are recommendations from more senior
analysts and Institutional Investor all-stars.

The characteristics of the additions and
deletions are similarly unusual. Additions disproportionately consist
of holds and sells; indeed, in the case of one prominent brokerage
firm, 91.5% of its 234 additions are sells, and these increase the
number of sells the firm has on the 2002 tape by a factor of 20.
Deletions, on the other hand, disproportionately consist of strong
buys, while alterations disproportionately consist of buys and strong
buys (which are typically revised down). Perhaps most strikingly, all
four types of changes correlate strongly with survival by both the
brokerage firm and by the analyst.

Follow the correlation: 

firms associated with these changes are substantially larger, both in
terms of the size of their investment banking operations and the size
of their research departments. Most remarkably, they employ between
eight and 16 times more analysts on average in 2002 than do unaffected
brokerage firms. . . In fact, continuing to publish research appears to
be a pre-condition for a brokerage firm’s recommendations to have
changed: Not a single recommendation associated with one of the 89
brokerage firms that have ceased publishing investment research by 2002
has been anonymized, whereas an astonishing 85.4% of the 280 firms that
continue publishing research had some recommendations anonymized.
Similar, though slightly less extreme patterns hold for alterations,
deletions, and additions.

And lastly, consider this: 

"A former Thomson executive with knowledge
of the I/B/E/S database told me he was skeptical that Thomson’s
validation procedures could prevent a concerted effort by Wall Street
to retouch its track record. The Thomson data are maintained by
overworked, inexperienced clerks, said the former executive."

Ouch . . .

This may turn out to be the most overlooked financial story of the weekend. 


DISCLOSURE: We have a modest short position in Thomson Corp (TOC)


Mysterious Changes in Key Wall Street Data
Bill Alpert
Barron’s,  MONDAY, MARCH 5, 2007

Rewriting History 
New York University
London Business School
University of Virginia
February 20, 2007, AFA 2007 Chicago Meetings Paper


Abstract: Comparing two snapshots of the historical I/B/E/S database of research
analyst stock recommendations, taken in 2002 and 2004 but each covering
the same time period 1993-2002, we identify 54,729 ex post changes (out
of 280,463 observations), including alterations of recommendation
levels, additions and deletions of records, and removal of analyst
names. The changes appear non-random across brokerage firms, analysts,
and tickers, and have a significant impact on the overall distribution
of recommendations across stocks and within individual stocks and
brokerage firms. They also affect trading signal classifications,
back-testing inferences, track records of individual analysts, and
models of analysts’ career outcomes in the three years following the

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What's been said:

Discussions found on the web:
  1. Brooklynite commented on Mar 5

    Ouch indeed. But does this amount to fraud?

    What is the recourse? Is Thomson reversing the changes?

  2. Rational Actor commented on Mar 5

    I don’t know anything about this study, but a very common sequence of events is the following:

    a) Market closes 3/5
    b) At 4:30, Company X announces that they will miss earnings by a wide margin
    c) Analysts rush to get reports out changing recommendation from “strong buy” to “sell”, using 3/5 as date for rating change
    d) Stock tanks on 3/6

    Even though there was no way to take action on the analysts’ recommendations, they still show up in the return calculations as “selling” before the plunge.

  3. Christopher Laudani commented on Mar 5

    It would be interesting to see if stock rating have been changed over on, which is owned by the 11 of the top broker/dealers! Gee, I wonder what their “data” shows?? wink…wink…

  4. Barry Ritholtz commented on Mar 5

    Barron’s notes that Thompson did restore some — but not all — of the altered recs last August.

    This is like the CEO that fakes Earnings, gets a huge bonus, and then leaves; when the earnings turn out to be bogus, the CEO never returns that ginormo performance bonus.

  5. michael schumacher commented on Mar 5


    You’ve just described BBI’s John Antioco to a “T”.

    However he is still there….LOL


  6. David Merkel commented on Mar 5

    Fascinating stuff. Another reason why I don’t use the sell side much, aside from its use as a measure of the consensus to bet against.

    I’m going to ferret through the academic paper this evening, and see there is anything more there. Thanks for posting this, Barry. I bet that this story gets legs.


  7. paul commented on Mar 5

    Given the patters you describe, it is a wonder that Thompson could possibly describe this as caused by a glitch.

    The question is whether firms have found a way to hack in to the database to change it? Or is Thomposon making changes because of payoffs or other relationships with some of the firms?

    Correcting the database 100% is a necessity. Otherwise, you’ll start to see papers arguing that provisions in Sar-Box were a panicked over-reaction to the time. (“Detailed analysis of the IBES analyst ratings showed much more objective assesments than previously thought…”)

  8. Sponge Todd Square Pants commented on Mar 5


    When is Larry Kudlow going to have you back? Maybe he will give you as much time to talk as his buddies this time. Whenever you or Dr Roubini start to make a logical argument, Larry starts to interrupt and kick it over to Art or Erin.

  9. ArizonaChartist commented on Mar 5

    “Even though there was no way to take action on the analysts’ recommendations, they still show up in the return calculations as “selling” before the plunge.”

    Same thing for lists described as “Focus”, “Best”, etc. To illustrate, I work for an independent advisor in the Raymond James system. Each year in December RJ releases its “Analysts’ Best Picks List” after the market closes. Stocks almost always gap up the next open but RJ measures list performance from the market close the day the list is announced after hours. No way anybody who doesn’t/can’t trade ah (ie, RJ clients cannot trade ah, coincidence?) can even come close to replicating the List’s published performance. We have learned to wait a few weeks to buy the List as the stocks mentioned almost always come back to earth after the List-related buying abates.

  10. VennData commented on Mar 5

    I gotta come down on the side of the analysts on this one:

    It’s simply no-docs analysts re-recommending once the teaser recommendation has reset.

  11. Tom C., Stamford,Ct. commented on Mar 5

    Wall Street walks a fine line between advice giver and confidence scam. He who has a conscience is at a distinct disadvantge.

  12. Mike commented on Mar 5

    Right on Barry … analysts have gotten away with the closing price of a stock rather than the open price which would be the first time you can trade the stock after the upgrade i.e. if stock has terrible news overnight the downgrade gets the closing 4pm price rather than the lower opening price the next morning when the downgrade was issued

  13. Philippe commented on Mar 5

    Why go so far in time on financial inconsistencies and profits assessments?
    Banks have been posting impressive profits two months ago at fiscal year end 2006 and two months after their bonds are traded close to junks.Are provision assessed and made after fiscal year end?

  14. booyah commented on Mar 6

    do permabears only make money once every 5 years and give the rest back the other 4 years??

  15. Barry Ritholtz commented on Mar 6

    LOL — I dunno, why don’t you go find one and ask them!

  16. Don commented on Mar 6

    The draft of the study has been out since August 3, which is what prompted Thomson to go back and reset the ratings. On another note, about two years ago, The Wall Street Journal had Zacks do a study based on stocks with analyst sell ratings versus stocks with analyst buy ratings. If you’re reading this blog, it’s no surprise to you which group you wanted to buy — the sell-rated stocks. In aggregate, sell-rated stocks did far better than buy-rated stocks, especially since Reg FD went into effect. Just another bit of evidence that analysts’ ratings are some of the most valuable bits of Wall Street research you can find. After all, what’s the definition of a perfect indicator? One that’s always WRONG. Well, analysts aren’t perfect (-ly wrong), but they’re pretty darned close. What I wasn’t aware of until August 2006 is that they go to such lengths to cover their tracks!

  17. Dirk van Dijk commented on Mar 7

    Don, that Zacks study also based the performance based on the close of the next trading day, which is even more realistic than based on the open since it assumes that it takes some time for participants to learn about the new information and act on it. None of this, you should have bought when the market was open 2 hours ago before the news came out stuff.

  18. Joe Christinat commented on Mar 9

    We are disappointed in the lack of investigative insight demonstrated in “Rewriting History,” by Alexander Ljungqvist (of New York University), Christopher J. Malloy (of the London Business School) and Felicia C. Marston (of the University of Virginia). These misguided authors have taken a sensationalist approach to describe the preeminent recommendations database on Wall Street – I/B/E/S.

    The authors of the report have overlooked a critical detail – their research was based on multiple sets of data. If analyzed as a whole, all of the data they claim is missing is actually present and accessible. The writers of the report clearly had little experience in dealing with Thomson Financial’s system, which is designed for financial professionals. Had they compiled, searched, and analyzed the database correctly, they would have no basis for their report. The discrepancies between the data sets are unrelated to changes made to any firm recommendations submitted to Thomson Financial. There have not been any systematic modifications to the firm data and Thomson Financial has always maintained the history of recommendations as published to Thomson Financial by the brokerage community.

    For each observation put forth by the authors there is an explanation steeped in the mundane intricacies of managing the recommendation history. Additionally, Thomson Financial offered to guide the authors through the database, to help them fully understand the data contained within, but the authors declined this offer.

    Failing to take the time to understand what they received, the authors published their conclusions based on the false premise that data was revised. Their claims are baseless and without merit.

    Joe Christinat
    Director, Media Relations
    Thomson Financial

  19. Bill Alpert commented on Mar 10


    I followed up in this week’s column on the Thomson matter, including Thomson’s comments — which they have never sent to us, but instead, post on blogs where the public has to hunt for them. I guess that means that print really is obsolete as a communications medium ! When are you going to take Dow Jones over, Barry ? Most public companies issue press releases when they respond to stories. I hope Thomson’s blogging satisfies their disclosure obligations under the securities laws.

    Bill Alpert

  20. Barry Ritholtz commented on Mar 10


    Have your people call my people, and we’ll work something out.


  21. Pete commented on Sep 5

    What was the outcome of this story? It seems to have fizzled, but without any real answers.

    Either the data was changed legitimately, or not. Which was it? Can anyone actually counter the specific claims in the paper by pointing out exactly where the original data is?

    In either case, the market often reacts relative to consensus estimate numbers calculated by IBES. So even if some analysts claim Thomson had their estimates wrong and were just correcting those values, providing both the revised consensus estimates along with the consensus estimates as they existed in the past is important.

    All indications are that this information is lost to anyone who doesn’t have historical snapshots of the data as it existed at the time.

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