Trade Generation, Reputation and Sell-Side Analysts
51 Pages Posted: 29 Aug 2003
Date Written: June 6, 2003
This paper examines the trade-generation and reputation-building incentives facing sell-side analysts. I demonstrate empirically that optimistic analysts generate more trade for their brokerage firms, as do high reputation analysts. Thus the analyst faces a conflict between telling the truth to build her reputation, and misleading investors via optimistic forecasts to generate short-term increases in commission. When the investor is unsure of the analyst's type, and when short sales constraints are present, I show using a simple model that equilibrium forecast optimism can exist, even when investment-banking affiliations are removed. Further tests support the model's analysis of the information game. The conclusions may have important policy implications for the recently proposed changes to the institutional structure of the broking industry.
Keywords: trade generation, sell-side analysts, reputation
JEL Classification: G29, L14, G24
Suggested Citation: Suggested Citation