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’ behaviour in setting target prices and stock recommendations. We demonstrate that the aggregate number of simultaneous business ties with a subject company is positively associated with optimism in target prices and recommendations. 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