Paving the Road to the Buy-Side

Abstract

Sell-side analysts commonly transition to buy-side money managers. I examine whether and how these career transitions shape sell-side analysts' behavior, relying on the granular career information of 6,310 analysts in the U.S. I identify analysts who transition from the sell-side to the buy-side and find that these analysts issue inflated recommendations on stocks of interest to their future buy-side employers. This favoritism is (i) present only during the year preceding their transition; (ii) more pronounced among stocks where a single analyst is more influential in moving stock price; and (iii) present only among transitions likely to be strategically planned. Additional analyses on target price forecasts reveal that these optimistic forecasts are less accurate. The findings uncover these career transitions as a previously undocumented source of conflicts of interest.

Keywords: equity analysts, analyst turnover, analyst incentives, stock recommendations

JEL Classification: G14, G20, G23, G24, G28