Incentives of Financial Analysts: Trading Turnover and Compensation

Abstract

Are sell-side security analysts paid for turnover-generating research? Using hand-collected annual income data from tax records in Sweden, I show that analysts' compensations increase in the trading turnover that their recommendations generate. Analysts are paid 0.002 % of broker-trading volume, or approximately 1 % of broker's commission revenues. I find a significant broker-turnover analyst-pay relationship only in the post-global-settlement period, and the relation is strongest for investment banking clients' stocks. These findings empirically validate the previously assumed turnover-compensation link and may have policy implications related to the Markets in Financial Instruments Directive.

Keywords: compensation, analyst, stock recommendation, broker

JEL Classification: G12, G24