PT - JOURNAL ARTICLE AU - Paul J. Bolster AU - Emery A. Trahan AU - Mahboubeh Ebrahimi TI - Trading Opportunities around Morningstar Stock Rating Changes AID - 10.3905/joi.2022.1.243 DP - 2022 Sep 27 TA - The Journal of Investing PG - joi.2022.1.243 4099 - https://pm-research.com/content/early/2022/09/27/joi.2022.1.243.short 4100 - https://pm-research.com/content/early/2022/09/27/joi.2022.1.243.full AB - The authors examine Morningstar information changes stemming from changes in their 5-Star stock-rating system. Converse to many studies of other second-hand information effects, Morningstar rating changes lead to abnormal returns (ARs) that persist for 30 days subsequent to the information release. This information may be used to derive alpha-generating trading strategies. Statistically significant positive ARs persist for 30 days postannouncement for upgrades to 4 and 5 stars, while significant negative ARs persist for 30 days postannouncement for upgrades to 2 and 3 stars and for downgrades to 4, 3, 2, or 1 star. Traders can use this information to devise long, short, and long–short trading strategies. Morningstar’s analysis has high credibility, particularly with retail investors. Morningstar changes a stock’s rating when the price of the stock moves further from the intrinsic value estimate derived by Morningstar’s model, suggesting that its analysis of the current stock price relative to intrinsic value and the timing of the rating change provide some relevant information to the market.