A Lesson Learned or Business as Usual? The Global Research Analyst Settlement and Analyst Research Quality

Abstract:     
We examine the impact of the Global Research Analyst Settlement (Global Settlement) on the relation between stock recommendations and residual income valuation estimates for the twelve firms cited in the settlement, along with investment bank, brokerage and independent research analysts. Following the approach of Bradshaw (2004), we find an improvement in the relation between stock recommendations and residual income valuation estimates after the Global Settlement, consistent with an improvement in the quality of analyst recommendations. Furthermore, our results suggest that this improvement in research quality continued even after the Global Settlement provisions expired in 2009. Lastly, we investigate the quality of independent analyst research funded by the Global Settlement. Findings indicate that funded research is of significantly lower quality than the research provided by typical research analysts, as these recommendations have a lower association with both contemporaneous intrinsic value and future abnormal returns.

Number of Pages in PDF File: 49

Keywords: Sell-side analysts, Independent research, Global Settlement, Recommendations, Valuation estimates, Valuation heuristics

JEL Classification: G24

working papers series