Comparing the Stock Recommendation Performance of Investment Banks and Independent Research Firms

43 Pages Posted: 4 Aug 2004

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Brett Trueman

University of California, Los Angeles (UCLA) - Anderson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: September 2005

Abstract

This study compares the profitability of security recommendations issued by investment banks and independent research firms. During the 1996 through mid-2003 time period, the average daily abnormal return to independent research firm buy recommendations exceeds that of the investment banks by 3.1 basis points, or almost 8 percentage points annualized. In contrast, investment bank hold and sell recommendations outperform those of independent research firms by -1.8 basis points daily, or -4½ percentage points annualized. Investment bank buy recommendation underperformance is concentrated in the subperiod subsequent to the NASDAQ market peak (March 10, 2000), where it averages 6.9 basis points per day, or slightly more than 17 percent annualized. More strikingly, during this period those investment bank buy recommendations outstanding subsequent to equity offerings underperform those of independent research firms by 8.7 basis points (almost 22 percent annualized). Taken as a whole, these results suggest that at least part of the underperformance of investment bank buy recommendations is due to a reluctance to downgrade stocks whose prospects dimmed during the early 2000's bear market, as claimed in the SEC's Global Research Analyst Settlement. Additional analyses find that the underperformance of investment bank buy recommendations extends not only to the ten investment banks sanctioned in the research settlement but to the non-sanctioned investment banks as well.

Keywords: Analyst, recommendation, investment bank, broker, independent research, Global Analyst Research Settlement, accounting, stock recommendation performance, independent research firms

JEL Classification: G12, G14, G29, G24

Suggested Citation

Barber, Brad M. and Lehavy, Reuven and Trueman, Brett, Comparing the Stock Recommendation Performance of Investment Banks and Independent Research Firms (September 2005). Available at SSRN: https://ssrn.com/abstract=572301 or http://dx.doi.org/10.2139/ssrn.572301

Brad M. Barber

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

Brett Trueman (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-4720 (Phone)
310-267-2193 (Fax)

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