Changes in Analysts’ Stock Recommendations Following Regulatory Action Against Their Brokerage

54 Pages Posted: 19 Jun 2019

See all articles by Andrew C. Call

Andrew C. Call

Arizona State University (ASU) - School of Accountancy

Nathan Y. Sharp

Texas A&M University - Department of Accounting

Paul A. Wong

University of California, Davis - Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 1, 2019

Abstract

Despite the importance of sell-side analysts in the capital markets, we know little about the effectiveness of routine monitoring of the sell-side industry. We examine the attributes of sell-side research issued by analysts before and after their brokerage is subject to regulatory sanctions. We find that after a regulatory action, analysts at sanctioned brokerages lower their stock recommendations, both in absolute terms and relative to the recommendations of other analysts following the same firms. Following a regulatory action, analysts at sanctioned brokerages are also more likely than analysts at other brokerages to downgrade a company’s stock after the receipt of unfavorable information about the firm. Importantly, we document that analysts at non-sanctioned brokerages also reduce the optimism in their stock recommendations when a peer analyst’s brokerage is sanctioned, consistent with regulatory spillovers as a result of routine regulatory monitoring. Our study provides empirical evidence that regulatory action against sell-side brokerages is associated with a reduction in sell-side analysts’ positive bias at both sanctioned and non-sanctioned brokerages.

Keywords: analysts, sell-side, stock recommendations, FINRA, regulators

JEL Classification: G10, G24, G38, K22, M40, M41

Suggested Citation

Call, Andrew C. and Sharp, Nathan Y. and Wong, Paul A., Changes in Analysts’ Stock Recommendations Following Regulatory Action Against Their Brokerage (May 1, 2019). Mays Business School Research Paper No. 3402180, Available at SSRN: https://ssrn.com/abstract=3402180 or http://dx.doi.org/10.2139/ssrn.3402180

Andrew C. Call (Contact Author)

Arizona State University (ASU) - School of Accountancy ( email )

Tempe, AZ 85287
United States

Nathan Y. Sharp

Texas A&M University - Department of Accounting ( email )

4353 TAMU
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

Paul A. Wong

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

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