Is Sell-Side Research Being Napsterized? Intellectual Property and the Sell-Side Industry

Abstract

Between 2009 and 2013, Theflyonthewall.com (FLY) leaks 58% of recommendation revisions, often before the market open and before I/B/E/S time stamps. We show FLY improves price discovery, but leaked recommendations hamper the ability of brokers to offer price improvement on trades routed through them. Three large brokers sued FLY and ultimately lost, upon which the average broker experienced -1.3% abnormal announcement returns. Consequently, brokers trim their analyst workforce and number of stocks covered. Overall, this disruption has negatively impacted the incentives to produce information leading to a further decline in the scope of the sell-side research industry.

Keywords: Value of analyst research, analysts' recommendations, Theflyonthewall.com, sell-side research

JEL Classification: G20, G23