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

Review of Accounting Studies, Forthcoming

Mays Business School Research Paper No. 3425543

Posted: 25 Jul 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: July 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 faces regulatory sanctions. We find that after a sanction, analysts at sanctioned brokerages lower their stock recommendations, both in absolute terms and relative to the recommendations of other analysts following the same firms. These analysts 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 nonsanctioned brokerages also reduce the optimism of their stock recommendations when a peer analyst’s brokerage is sanctioned, consistent with spillovers as a result of routine regulatory monitoring. Our study provides evidence that regulatory action against sell-side brokerages is associated with a reduction in sell-side analysts’ positive bias.

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 (July 1, 2019). Review of Accounting Studies, Forthcoming, Mays Business School Research Paper No. 3425543, Available at SSRN: https://ssrn.com/abstract=3425543

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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