Optimism Biases Among Brokerage and Non-Brokerage Firms' Equity Recommendations: Agency Costs in the Investment Industry

14 Pages Posted: 13 Jan 2005

See all articles by Carl R. Chen

Carl R. Chen

University of Dayton

Thomas L. Steiner

University of Dayton

Willard T. Carleton

University of Arizona

Multiple version iconThere are 2 versions of this paper

Abstract

This paper studies the investment recommendations made by brokerage and nonbrokerage firms in an effort to examine the differential agency costs across three unique recommendation production environments. Using the ACE database, recommendation production environments are categorized into national, regional, and non-brokerage firms. The results prove that differences exist between brokerage and nonbrokerage firms: 1) brokerage firms significantly inflate recommendations; 2) regional firms significantly inflate recommendations, compared to national firms; 3) brokerage firms' recommendations, compared to nonbrokerage firms' recommendations, are less credible and less predictive of future stock performance; 4) national firms have more reputational capital, and therefore, their recommendations are more predictive of investment performance than the regional brokerage firms' recommendations.

Suggested Citation

Chen, Carl R. and Steiner, Thomas L. and Carleton, Willard T., Optimism Biases Among Brokerage and Non-Brokerage Firms' Equity Recommendations: Agency Costs in the Investment Industry. Financial Management, Vol. 27, No. 1, pp. 17-30, Spring 1998. Available at SSRN: https://ssrn.com/abstract=648163

Carl R. Chen (Contact Author)

University of Dayton ( email )

300 College Park
Dayton, OH 45469-2251
United States
937-229-2418 (Phone)
937-229-2477 (Fax)

Thomas L. Steiner

University of Dayton ( email )

300 College Park
Dayton, OH 45469-2251
United States
937-229-2563 (Phone)
937-229-2477 (Fax)

Willard T. Carleton

University of Arizona

Department of History
Tucson, AZ 85721
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
16
Abstract Views
1,562
PlumX Metrics