Investment Banks’ Research Activities in the Post-Reform Era: Are Analysts’ Conflicts of Interest Still Alive?

45 Pages Posted: 10 May 2021

See all articles by Michel Dubois

Michel Dubois

University of Neuchatel - Institute of Financial Analysis

Andreea Moraru-Arfire

ESSEC Business School

Date Written: May 6, 2021

Abstract

In this paper, we identify a channel where affiliated banks maintain a positive gap between the implied return (computed from target price) of the corporate client stock and that of the client’s peer. This behavior is triggered after the business deal disclosure when investment banks, including those sanctioned in the Global Research Settlement Act, are most likely to exploit such conflicts. The client’s high institutional ownership and target prices issued in isolation exacerbate the implied return gap. We show that the subsequent sanctions incurred for the violation of Financial Industry Regulatory Authority’s rules effectively discourage the affiliated investment banks to favor their corporate clients via the client-peer channel.

Keywords: Conflicts of interest, Financial analysts, Global Research Settlement Act, Product market competition, Target prices

JEL Classification: G24, G28, K22, K42

Suggested Citation

Dubois, Michel and Moraru-Arfire, Andreea, Investment Banks’ Research Activities in the Post-Reform Era: Are Analysts’ Conflicts of Interest Still Alive? (May 6, 2021). Available at SSRN: https://ssrn.com/abstract=3841172 or http://dx.doi.org/10.2139/ssrn.3841172

Michel Dubois

University of Neuchatel - Institute of Financial Analysis ( email )

Pierre-a-Mazel, 7
Neuchatel, 2000
Switzerland
41 32 718 13 66 (Phone)
41 32 718 13 61 (Fax)

Andreea Moraru-Arfire (Contact Author)

ESSEC Business School ( email )

Av Bernard Hirsch
Cergy-Pontoise 95021
France

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