Sending Mixed Messages: Investor Interpretations of Disclosures of Analyst Stock Ownership

Abstract:     
A sell-side securities analyst who recommends a stock that the analyst owns has a conflict of interest. If investors buy the stock in response to the analyst’s recommendation, the price of the stock will rise, increasing the analyst’s personal wealth. Because of this conflict of interest, analysts are required by law to disclose any financial interest in securities of companies they cover. However, some investors might view this disclosure favorably – for example, as a sign of the analyst’s confidence in the stock – rather than unfavorably as the law intends. This article presents the results of an experiment indicating that, investors view analyst stock ownership more unfavorably than favorably. However, it also finds evidence that a substantial proportion of investors view analyst stock ownership favorably. In addition, the experiment’s results indicate that a disclosure that also briefly explains why analyst stock ownership creates a conflict of interest would be more effective.

Number of Pages in PDF File: 33

Keywords: Analyst, Conflict of Interest, Disclosure, Stock, Broker-Dealer, Investor, Investor Protection

JEL Classification: K20, K22

working papers series