Hype My Stock: Do Firms Really Want Biased Research?

40 Pages Posted: 6 Mar 2008 Last revised: 14 Nov 2013

See all articles by Roger Loh

Roger Loh

Singapore Management University - Lee Kong Chian School of Business

Date Written: May 2009

Abstract

Analyst research is alleged to be biased because of conflicts of interest when analysts’ employers underwrite securities for the firms covered. I posit that affiliated analyst optimism should be the strongest for offering firms with a desire to over-inflate stock prices. I hypothesize that a firm’s corporate governance and its CEO incentives are related to the affiliation bias. Using stock recommendations data, I find evidence that the affiliation bias is indeed more pervasive for firms with high CEO wealth sensitivity to stock price (i.e., high CEO delta). The larger affiliation bias for high delta firms remains even after the introduction of regulatory reforms aimed at limiting analyst optimism. There is mixed evidence that firms with poorer corporate governance have more serious analyst affiliation biases. Examining event reactions to recommendations, I find that the market does not sufficiently discount the fact that affiliated analyst optimism is more serious for some firms. I also show post-offering evidence suggestive of quid quo pro in that hyping banks win more future deals for high delta firms while the firm’s CEO makes more insider stock sales.

Keywords: Conflicts of Interest, Affiliation Bias, Security Analysts, Investment banks, Corporate Governance, Biased Research, Stock Recommendations

JEL Classification: G24, G34, G38

Suggested Citation

Loh, Roger, Hype My Stock: Do Firms Really Want Biased Research? (May 2009). EFA 2008 Athens Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1102719 or http://dx.doi.org/10.2139/ssrn.1102719

Roger Loh (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

Lee Kong Chian School of Business
50 Stamford Rd
Singapore, 178899
Singapore

HOME PAGE: http://www.mysmu.edu/faculty/rogerloh/

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