Abstract

http://ssrn.com/abstract=649684
 
 

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Conflicts of Interest in Sell-side Research and the Moderating Role of Institutional Investors


Alexander Ljungqvist


New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Felicia C. Marston


University of Virginia - McIntire School of Commerce

Hong Yan


University of South Carolina; Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Laura T. Starks


University of Texas at Austin - Department of Finance

Kelsey D. Wei


University of Texas at Dallas

September 12, 2005


Abstract:     
Sell-side analysts face pressure to provide favorable opinions on their employers' investment banking clients and to boost brokerage business, yet institutional investors value unbiased research. Because of their dependence on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to pressure in stocks that are highly visible to their institutional investor constituency. Given the apparent severity of analyst conflicts of interest in the late 1990s, we examine a comprehensive sample of analyst recommendations over the 1994-2000 period. We find that analysts' recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investors in the firm being followed. This is especially true when there are more institutions holding larger blocks in the firm, and for firms whose institutional holdings are concentrated in the hands of the largest institutional investors. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Number of Pages in PDF File: 51

Keywords: Analyst recommendations, Analyst forecast accuracy, Investment banking, Conflicts of Interest, Institutional investors, Banking Relationships

JEL Classification: G20, G21, G23, G24

working papers series


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Date posted: January 17, 2005  

Suggested Citation

Ljungqvist, Alexander and Marston, Felicia C. and Yan, Hong and Starks, Laura T. and Wei, Kelsey D., Conflicts of Interest in Sell-side Research and the Moderating Role of Institutional Investors (September 12, 2005). Available at SSRN: http://ssrn.com/abstract=649684 or http://dx.doi.org/10.2139/ssrn.649684

Contact Information

Alexander Ljungqvist (Contact Author)
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street, Suite 9-160
New York, NY 10012-1126
United States
212-998-0304 (Phone)
212-995-4220 (Fax)
HOME PAGE: http://pages.stern.nyu.edu/~aljungqv
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Research Institute of Industrial Economics (IFN) ( email )
Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden
Felicia C. Marston
University of Virginia (UVA) - McIntire School of Commerce ( email )
P.O. Box 400173
Charlottesville, VA 22904-4173
United States
804-924-1417 (Phone)
Hong Yan
University of South Carolina ( email )
Department of Finance
Moore School of Business
Columbia, SC 29208
United States
(803)777-4905 (Phone)
Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )
Shanghai
China
Laura T. Starks
University of Texas at Austin - Department of Finance ( email )
Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)
Kelsey D. Wei
University of Texas at Dallas ( email )
P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)
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