Do Independent Analysts Provide Superior Stock Recommendations?

Abstract

Many investors were upset with the losses they experienced by following the recommendations of stock analysts during the recent market downturn. Allegations that these recommendations were often tainted by investment banking relationships fueled their anger. This study examines the investment performance of stock recommendations made by analysts employed by lead underwriters as compared to analysts independent of investment banking. The results indicate that during the 1994-2003 time period, affiliated analysts offered inferior investment advice for all recommendation categories except Sell. The paper then examines possible causes and finds that investment banking conflict of interest is a more complete explanation than a selection bias.

Keywords: Stock recommendations, analysts, banking conflicts

JEL Classification: G14, G24, G28