Which Matters: 'Paying to Play' or Stable Business Relationship? Evidence on Analyst Recommendation and Mutual Fund Commission Fee Payment

46 Pages Posted: 15 Feb 2015

See all articles by Haozhi (Rachel) Huang

Haozhi (Rachel) Huang

Macquarie University

Mingsheng Li

Bowling Green State University - College of Business Administration

Jing Shi

Macquarie University

Multiple version iconThere are 3 versions of this paper

Date Written: Jan 14, 2015

Abstract

This paper investigates the effect of stable business relationships between brokerage firms and mutual funds on analyst recommendations. Although the amount of commission fees a brokerage firm receives is the primary factor affecting recommendation aggressiveness of the brokerage firm’s analysts, we find that analysts also issue more optimistic recommendations on stocks that are held by their brokerage firms’ stably related funds (SRFs) than on stocks that are held by other funds. The effect is robust after controlling for commission fees, funds’ shareholding and other factors. In addition, commission fees, fund size, and brokerage firms’ resources are primary factors affecting the likelihood of maintaining a stable relationship between a brokerage firm and its client funds. Young funds, and especially those in small fund families, have more incentives to keep business ties with their current brokerage firms. A common ownership affiliation with a third institute further enhances the chance for the brokerage firm and the funds keep a stable relationship.

Keywords: analyst recommendation, mutual fund, business relationship

JEL Classification: G23, G24

Suggested Citation

Huang, Haozhi and Li, Mingsheng and Shi, Jing, Which Matters: 'Paying to Play' or Stable Business Relationship? Evidence on Analyst Recommendation and Mutual Fund Commission Fee Payment (Jan 14, 2015). Asian Finance Association (AsianFA) 2015 Conference Paper. Available at SSRN: https://ssrn.com/abstract=2564919 or http://dx.doi.org/10.2139/ssrn.2564919

Haozhi Huang (Contact Author)

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Mingsheng Li

Bowling Green State University - College of Business Administration ( email )

Bowling Green, OH 43403
United States

Jing Shi

Macquarie University ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
Australia

HOME PAGE: http://https://researchers.mq.edu.au/en/persons/jing-shi

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