Brokerage Relationships and Analyst Forecasts: Evidence from the Protocol for Broker Recruiting

Review of Accounting Studies, Forthcoming

47 Pages Posted: 11 Oct 2021

See all articles by Braiden Coleman

Braiden Coleman

Indiana University - Kelley School of Business - Department of Accounting

Michael S. Drake

Brigham Young University - Marriott School

Joseph Pacelli

Harvard Business School

Brady J. Twedt

University of Oregon - Lundquist College of Business

Date Written: October 6, 2021

Abstract

In this study, we offer novel evidence on how the nature of brokerage-client relationships can
influence the quality of equity research. We exploit a unique setting provided by the Protocol for
Broker Recruiting to examine whether relaxed broker non-compete agreement (NCA) enforcement
generates spillover effects on sell-side analysts. Entry into this agreement reassigns ownership of
the client relationship from the brokerage house to individual brokers, potentially generating a
greater standard of care. Using a generalized difference-in-difference research design, we provide
evidence consistent with brokers reducing pressure on analysts to produce optimistic research
following protocol entry. This effect is concentrated among less experienced and non-All Star
analysts, who previously may have faced the greatest pressures to sacrifice objectivity.
Additionally, we find that analysts issue more accurate forecasts and generate reports with
heightened market reactions following protocol entry. Our collective evidence sheds new light on
how the nature of brokerage relationships can influence analysts’ research production.

Keywords: analysts, forecasts, bias, protocol

JEL Classification: G14, G24

Suggested Citation

Coleman, Braiden and Drake, Michael S. and Pacelli, Joseph and Twedt, Brady J., Brokerage Relationships and Analyst Forecasts: Evidence from the Protocol for Broker Recruiting (October 6, 2021). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3937471

Braiden Coleman (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Michael S. Drake

Brigham Young University - Marriott School ( email )

United States

Joseph Pacelli

Harvard Business School ( email )

Boston, MA 02163
United States

Brady J. Twedt

University of Oregon - Lundquist College of Business ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

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