Which Matters: 'Paying to Play' or Stable Business Relationships? Evidence on Analyst Recommendations and Mutual Fund Commission Fee Payments

Pacific-Basin Finance Journal, Forthcoming

Posted: 15 Jul 2016

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

Date Written: July 13, 2016

Abstract

This paper investigates the factors that affect the likelihood of maintaining a stable relationship between a brokerage firm and its client funds and the effect of such a stable business relationship on analyst recommendations. We find that young funds, particularly those in small fund families, have more incentives to maintain business ties with their current brokerage firms. A common ownership affiliation between a fund and a brokerage firm or with a third institution further enhances the probability that the brokerage firm and the funds will maintain a stable relationship. More importantly, analysts 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 more pronounced after excluding large firms. The results are robust after controlling for underwriting relation, commission fees, funds’ shareholding and other factors.

Keywords: Chinese mutual funds, Open-ended equity funds, Analyst recommendation, Stable business relationship, Customer relationship management

JEL Classification: G14

Suggested Citation

Huang, Haozhi and Li, Mingsheng and Shi, Jing, Which Matters: 'Paying to Play' or Stable Business Relationships? Evidence on Analyst Recommendations and Mutual Fund Commission Fee Payments (July 13, 2016). Pacific-Basin Finance Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2809323

Haozhi Huang

Macquarie University ( email )

North Ryde
Sydney, New South Wales 2109
Australia

Mingsheng Li (Contact Author)

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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