The Effectiveness of Reputation as a Disciplinary Mechanism in Sell-Side Research

Posted: 8 Sep 2009

See all articles by Lily H. Fang

Lily H. Fang

INSEAD - Finance

Ayako Yasuda

University of California, Davis - Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 2009

Abstract

We examine whether the quality differentials in earnings forecasts between reputable and nonreputable analysts vary with the severity of conflicts of interest. We measure personal reputation using the Institutional Investor All-American (AA) awards, and bank reputation using Carter-Manaster ranks. While both personal and bank reputation are associated with higher quality forecasts overall, their effectiveness against conflicts of interest differs. The severity of conflicts has a negative and significant effect on the performance of non-AAs at top-tier banks relative to other analysts, while it has a positive and significant effect on the performance of AAs at top-tier banks relative to others. Thus personal reputation is an effective disciplinary device against conflicts of interest, while bank reputation alone is not.

Keywords: G14, G24, G28, D82, J44

Suggested Citation

Fang, Lily H. and Yasuda, Ayako, The Effectiveness of Reputation as a Disciplinary Mechanism in Sell-Side Research (September 2009). The Review of Financial Studies, Vol. 22, Issue 9, pp. 3735-3777, 2009. Available at SSRN: https://ssrn.com/abstract=1468196 or http://dx.doi.org/hhn116

Lily H. Fang

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Ayako Yasuda

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-0775 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.ayakoyasuda.com

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