Conflict-of-Interest Reforms and Investment Bank Analysts’ Research Biases

49 Pages Posted: 6 Aug 2010

See all articles by Yuyan Guan

Yuyan Guan

Nanyang Business School, Nanyang Technological University

Hai Lu

University of Toronto - Rotman School of Management

M.H. Franco Wong

University of Toronto - Rotman School of Management

Date Written: June 29, 2010

Abstract

This study examines the consequences of the series of reforms targeting investment-banking-related conflicts of interest. We compare and contrast optimism biases in analysts’ stock recommendations and earnings forecasts across different types of analyst firms in the post-reform period 2004–2007 versus the pre-reform period 1998–2001. We document a significant reduction in the relative optimism of sanctioned investment bank analysts’ stock recommendations, but not their earnings forecasts. Moreover, we find little change in the profitability of their stock recommendations, but detect a drop in the accuracy of earnings forecasts made by investment bank analysts. In sum, the reforms achieve the objective of mitigating the apparent optimism in investment bank stock recommendations, but they do not provide benefit to investors in terms of more profitable recommendations or more accurate earnings forecasts.

Keywords: Analysts, Regulation, Conflict-of-interest, Global Settlement, Investment bank, Analyst bias

JEL Classification: G24, G28, K22, K23, M41

Suggested Citation

Guan, Yuyan and Lu, Hai and Wong, M.H. Franco, Conflict-of-Interest Reforms and Investment Bank Analysts’ Research Biases (June 29, 2010). Journal of Accounting, Auditing and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1654003

Yuyan Guan

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

Hai Lu (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

M.H. Franco Wong

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6
Canada
416-946-0729 (Phone)

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Wong.aspx

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