Sell-Side Analyst Research and Reported Conflicts of Interest
European Financial Management (Forthcoming)
44 Pages Posted: 5 Mar 2011 Last revised: 19 Nov 2012
Date Written: August 09, 2012
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
Suggested Citation: Suggested Citation