Banking Relationships and Sell-Side Research
O. Emre Ergungor
Federal Reserve Bank of Cleveland - Research Department
Case Western Reserve University - Weatherhead School of Management
Lehigh University - College of Business & Economics
Ajai K. Singh
Case Western Reserve University - Department of Banking & Finance
February 14, 2009
FRB of Cleveland Working Paper No. 11-14
This paper examines disclosures by sell-side analysts when their institution has a lending relationship with the firms being covered. Lending-affiliated analysts’ earnings forecasts are found to be more accurate relative to forecasts by other analysts but this differential accuracy manifests itself only after the advent of the loan. Despite this increased earnings forecast accuracy, lending-affiliated analysts exhibit undue optimism in their brokerage recommendations and forecasts of long term growth. The optimism exists both before and after the lending commences. The evidence suggests that any insights into the covered firm via the lending relationship are employed by bank analysts in a selective manner. They appear unwilling to compromise on disclosures where ex post accuracy is clearly revealed, possibly to preserve their own personal reputation. However, they are overly optimistic on other disclosures where resolution is less readily verifiable, possibly to promote their lending client’s financial standing.
Number of Pages in PDF File: 56
Keywords: relationship lending, investment bank relationships, sell-side research, analyst forecast accuracy
JEL Classification: G21, G24working papers series
Date posted: February 14, 2009 ; Last revised: June 30, 2011
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