Conflict of Interest and the Credibility of Underwriters Analyst Recommendations
Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC)
Kent L. Womack
University of Toronto - Rotman School of Management
Review of Financial Studies, Vol. 12, Issue 3, 1999
Brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public. We show that stocks that underwriter analysts recommend perform more poorly than "buy" recommendations by unaffiliated brokers prior to, at the time of, and subsequent to the recommendation date. We conclude that the recommendations by underwriter analysts show significant evidence of bias. We show also that the market does not recognize the full extent of this bias. The results suggest a potential conflict of interest inherent in the different functions that investment bankers perform.
JEL Classification: G12, G14Accepted Paper Series
Date posted: May 8, 1999
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