Does Reputation Mitigate Analysts’ Conflicts of Interest? Evidence from Recommendations

Abstract:     
We examine the impact of firm- and personal-level reputation on the incentives of analysts to curry favor with issuing firms. We find that unaffiliated non-star analysts from high reputation investment banks issue more strong-buy recommendations during high IPO underpricing periods than in low IPO underpricing periods and that the market discounts these recommendations, consistent with greater analyst conflicts during hot markets. This suggests that IPO underpricing provides sufficient indirect benefits such that reputable banks are willing to sacrifice their reputation to curry favor to win mandates. Unaffiliated all-star analysts from high reputation investment banks do not follow the same pattern, indicating that personal reputation mitigates the incentive to curry favor. We also examine whether unaffiliated analysts maintain coverage following an SEO if they are not selected as a part of the managing syndicate. Unaffiliated all-star analysts maintain coverage while unaffiliated non-star analysts reduce coverage, consistent with currying favor being the main reason non-star analysts provide coverage for issuing firms.

Number of Pages in PDF File: 38

Keywords: Analysts, IPOs, investment banking, conflicts of interest

JEL Classification: G24

working papers series