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Conflicts of Interest and Stock Recommendations: The Effects of the Global Settlement and Related Regulations


Leonardo Madureira


Case Western Reserve University - Weatherhead School of Management

Ohad Kadan


Olin Business School, Washington University in St. Louis

Rong Wang


Singapore Management University; Singapore Management University - Lee Kong Chian School of Business

Tzachi Zach


Ohio State University (OSU) - Fisher College of Business

February 1, 2008

AFA 2006 Boston Meetings Paper
Review of Financial Studies, vol. 22, no. 2, 4189-4217, 2009
AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper
EFA 2005 Moscow Meetings

Abstract:     
This paper studies the effect of regulations on sell-side analysts' research. These regulations - NASD Rule 2711, NYSE Rule 472, and the Global Analyst Research Settlement - attempted to mitigate the interdependence between research and investment bank departments of U.S. brokerage houses. We document that since the regulations have been in place, many brokerage houses have migrated from the traditional five-tier rating system to a coarser three-tier system. In addition, optimistic recommendations have become less frequent and more informative, whereas neutral and pessimistic recommendations have become more frequent and less informative. Importantly, the overall informativeness of recommendations has declined. The likelihood of issuing optimistic recommendations no longer depends on whether analysts are affiliated with the covered firm, although affiliated analysts are still reluctant to issue pessimistic recommendations. An analysis of price reactions to recommendations provides mixed evidence on whether investors discount affiliated recommendations to a lesser extent than they did before the regulations.

Number of Pages in PDF File: 37

Keywords: Recommendation, Global Settlement, NASD 2711, NYSE 472, Underwriting Business, Broker

JEL Classification: G12, G14, G24, G28, G29, K29

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Date posted: August 3, 2005 ; Last revised: November 14, 2013

Suggested Citation

Madureira, Leonardo and Kadan, Ohad and Wang, Rong and Zach, Tzachi, Conflicts of Interest and Stock Recommendations: The Effects of the Global Settlement and Related Regulations (February 1, 2008). AFA 2006 Boston Meetings Paper; Review of Financial Studies, vol. 22, no. 2, 4189-4217, 2009; AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper; EFA 2005 Moscow Meetings. Available at SSRN: http://ssrn.com/abstract=568884 or http://dx.doi.org/10.2139/ssrn.568884

Contact Information

Leonardo Madureira
Case Western Reserve University - Weatherhead School of Management ( email )
364 PBL Building
Cleveland, OH 44106
United States
216-368-5003 (Phone)
HOME PAGE: http://faculty.weatherhead.case.edu/madureira/
Ohad Kadan (Contact Author)
Olin Business School, Washington University in St. Louis ( email )
One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
Rong Wang
Singapore Management University ( email )
Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore
Singapore Management University - Lee Kong Chian School of Business ( email )
469 Bukit Timah Road
Singapore 912409
Singapore

Tzachi Zach
Ohio State University (OSU) - Fisher College of Business ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-292-4101 (Phone)

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