Conflict-of-Interest Reforms and Investment Bank Analysts’ Research Biases
49 Pages Posted: 6 Aug 2010
Date Written: June 29, 2010
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: Suggested Citation