Banking Relationships and Sell-Side Research

56 Pages Posted: 14 Feb 2009 Last revised: 30 Jun 2011

See all articles by O. Emre Ergungor

O. Emre Ergungor

affiliation not provided to SSRN

Leonardo Madureira

Case Western Reserve University - Weatherhead School of Management

Nandkumar Nayar

Lehigh University - College of Business & Economics

Ajai K. Singh

Department of Finance, University of Central Florida

Date Written: February 14, 2009

Abstract

This paper examines disclosures by sell-side analysts when their institution has a lending relationship with the firms being covered. Lending-affiliated analysts’ earnings forecasts are found to be more accurate relative to forecasts by other analysts but this differential accuracy manifests itself only after the advent of the loan. Despite this increased earnings forecast accuracy, lending-affiliated analysts exhibit undue optimism in their brokerage recommendations and forecasts of long term growth. The optimism exists both before and after the lending commences. The evidence suggests that any insights into the covered firm via the lending relationship are employed by bank analysts in a selective manner. They appear unwilling to compromise on disclosures where ex post accuracy is clearly revealed, possibly to preserve their own personal reputation. However, they are overly optimistic on other disclosures where resolution is less readily verifiable, possibly to promote their lending client’s financial standing.

Keywords: relationship lending, investment bank relationships, sell-side research, analyst forecast accuracy

JEL Classification: G21, G24

Suggested Citation

Ergungor, Ozgur Emre and Madureira, Leonardo and Nayar, Nandkumar and Singh, Ajai K., Banking Relationships and Sell-Side Research (February 14, 2009). FRB of Cleveland Working Paper No. 11-14. Available at SSRN: https://ssrn.com/abstract=1874339 or http://dx.doi.org/10.2139/ssrn.1874339

Ozgur Emre Ergungor

affiliation not provided to SSRN

Leonardo Madureira (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States
216-368-5003 (Phone)

HOME PAGE: http://faculty.weatherhead.case.edu/madureira/

Nandkumar Nayar

Lehigh University - College of Business & Economics ( email )

621 Taylor Street, Rauch Business Center
Lehigh University
Bethlehem, PA 18015-3117
United States
610-758-4161 (Phone)
610-758-6429 (Fax)

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

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