The Effectiveness of Reputation as a Disciplinary Mechanism in Sell-Side Research

46 Pages Posted: 11 Sep 2004 Last revised: 3 Aug 2010

Lily H. Fang

INSEAD - Finance

Ayako Yasuda

University of California, Davis - Graduate School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: April 16, 2008

Abstract

Using 1983-2002 U.S. data, we examine whether the quality differentials in earnings forecasts between reputable and non-reputable analysts vary as the severity of conflicts of interest varies. We measure personal reputation using the Institutional Investor All-American (AA) awards, and bank reputation using Carter-Manaster ranks. While both personal reputation and bank reputation are associated with higher-quality forecasts overall, their effectiveness against conflicts of interest differs. The severity of conflicts (proxied by the aggregate volume of new equity issues) has a negative and significant effect on the performance of non-AAs at top-tier banks relative to both AAs at top-tier banks and non-AAs at lower-tier banks. In contrast, the severity of conflicts has a positive and significant effect on the performance of AAs at top-tier banks relative to both non-AAs at top-tier banks and AAs at lower-tier banks. These findings suggest that personal reputation is an effective disciplinary device against conflicts of interest, while bank reputation alone is not.

Keywords: Analyst research, Earnings forecast, Analyst reputation, Bank reputation, Conflict of interest, Investment banking

JEL Classification: G14, G24, G28, D82, J44

Suggested Citation

Fang, Lily H. and Yasuda, Ayako, The Effectiveness of Reputation as a Disciplinary Mechanism in Sell-Side Research (April 16, 2008). EFA 2006 Zurich Meetings; Review of Financial Studies, Vol. 22, pp. 3735-3777. Available at SSRN: https://ssrn.com/abstract=587961

Lily H. Fang

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Ayako Yasuda (Contact Author)

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States
530-752-0775 (Phone)
530-752-2924 (Fax)

HOME PAGE: http://www.ayakoyasuda.com

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