Do Investment Banks Listen to Their Own Analysts?

44 Pages Posted: 11 Aug 2009

See all articles by Bradford D. Jordan

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Qun Wu

U of Nevada, Reno

Date Written: November 10, 2008

Abstract

To what extent conflicts of interest affect the investment value of sell-side analyst research is an ongoing debate. We approach this issue from a new direction by investigating how asset-management divisions of investment banks use stock recommendations issued by their own analysts. Based on holdings changes around initiations, upgrades, and downgrades from 1993 to 2003, we find that these bank-affiliated investors follow recommendations from sell-side analysts in general, increasing (decreasing) their relative holdings following positive (negative) recommendations. More importantly, these investors respond more strongly to recommendations issued by their own analysts than to those issued by analysts affiliated with other banks, especially for recommendations on small and low-analyst-coverage firms. Thus, we find that investment banks 'eat their own cooking,' showing that these presumably sophisticated and well-informed institutional investors view sell-side recommendations as having significant investment value, particularly when the recommendations come from their own analysts.

Keywords: Analyst stock recommendations, conflicts of interest, security analysts, investment banks, institutional investors

JEL Classification: G11, G14, G24

Suggested Citation

Jordan, Bradford D. and Liu, Mark H. and Wu, Qun, Do Investment Banks Listen to Their Own Analysts? (November 10, 2008). Available at SSRN: https://ssrn.com/abstract=1446505 or http://dx.doi.org/10.2139/ssrn.1446505

Bradford D. Jordan

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-4887 (Phone)
859-257-9688 (Fax)

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

Qun Wu (Contact Author)

U of Nevada, Reno ( email )

1664 N Virginia St
Reno, NV NEVADA 89557
United States
7756829173 (Phone)

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