Sell-Side Analyst Research and Reported Conflicts of Interest

Abstract

Using a unique dataset of conflicts of interest reported by a large investment bank, we examine the relationship between conflicts of interests and sell-side analysts’ behavior in setting target prices and stock recommendations. We demonstrate that the aggregate number of simultaneous business ties or personal links with a subject company is positively associated with both target prices and recommendations. These findings hold both in a stand-alone setting and when considered net of the prevailing market consensus. Furthermore, the results provide some indication that stocks for which conflicts of interests exist earn lower risk-adjusted returns than unconflicted stocks. However, we find no evidence that investors discount the value of sell-side analysts’ research with respect to the prevailing level of conflicts.

Keywords: Target Prices, Stock Recommendations, Conflicts of Interest, Bias, Regulation

JEL Classification: G14, G15