Brokerage-Firm Trading and Profits around Recommendation Revision Dates
45 Pages Posted: 4 Dec 2007 Last revised: 5 Jun 2014
Date Written: June 4, 2014
We examine the extent to which brokers generate profits for their customers by issuing stock recommendations, and whether these profits can explain the elevated trading volumes around the time they are issued. Using a comprehensive data set of brokers' daily transactions on the Stockholm Stock Exchange over a ten-year period, we show that most of the profits and trading volumes generated by recommendations can be attributed to upgrades to the shares of large firms. A large fraction of the profits comes from transactions done before the recorded recommendation date, suggesting information leakages, tipping or postdated recommendations. It is "uninformed" brokers, i.e. those without their own analyst coverage of the recommended stock, that stand on the other side of the recommendation-motivated trades. Our results provide empirical evidence for the "Quid Pro Quo model" of equity research, whereby brokers selectively disseminate research to customers who in turn pay for investment advice through trading commissions.
Keywords: Stock recommendations, Performance evaluation, Information leakages
JEL Classification: G14, G24, J44
Suggested Citation: Suggested Citation