Investment Bank Monitoring and Bonding of Security Analysts’ Research
49 Pages Posted: 1 Aug 2018 Last revised: 28 May 2019
Date Written: July 31, 2018
We assess investment banks’ influence over the agreement between their analysts’ research behavior and their clients’ interests, in the post-reform era. Competing banks discipline their analysts with worse career outcomes for producing biased reports, issuing shirking reports, and for involvement in the earnings guidance game, showing meaningful monitoring of their analysts. Highly reputable banks provide more monitoring discipline of their analysts and bonding of their moral hazard than other banks. Bank reputation is uniquely important because the expected benefits from analyst personal reputation are too little to bond the typical analyst’s moral hazard. The findings agree with the banks taking responsibility for aligning analysts’ behavior with clients’ interests.
Keywords: Analysts, Analysts’ forecasts, Analysts’ recommendations, Career outcome, Earnings guidance, Financial analysts, Financial markets, Herding, Investment banking, Management forecasts, Management guidance, Market efficiency, Piggybacking, Regulatory change, Security analysts, Shirking
JEL Classification: D82, G2, G24, G29, M41
Suggested Citation: Suggested Citation