Sending Mixed Messages: Investor Interpretations of Disclosures of Analyst Stock Ownership

Abstract

Sell-side securities analysts who recommend stocks that they own have a conflict of interest. If investors buy the stocks in response to the analysts’ recommendations, the stocks’ prices will rise, increasing the analysts’ personal wealth. Thus, analysts are legally required to disclose financial interests in securities of companies they cover. However, investors might view this disclosure favorably – for example, as a sign of the analyst’s confidence in the stock – rather than unfavorably as the law intends. This article presents the results of an experiment indicating that investors view analyst stock ownership more unfavorably than favorably. In addition, the experiment’s results suggest that disclosures that also briefly explain why analyst stock ownership creates a conflict of interest would lead investors to view it even more unfavorably.

Keywords: Analyst, Conflict of Interest, Disclosure, Stock, Broker-Dealer, Investor, Investor Protection

JEL Classification: K20, K22