Conflicts of Interest in Sell-Side Research and the Moderating Role of Institutional Investors

51 Pages Posted: 17 Jan 2005

See all articles by Alexander Ljungqvist

Alexander Ljungqvist

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Research Institute of Industrial Economics (IFN)

Felicia C. Marston

University of Virginia - McIntire School of Commerce

Hong Yan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Laura T. Starks

University of Texas at Austin - Department of Finance

Kelsey D. Wei

University of Texas at Dallas

Multiple version iconThere are 4 versions of this paper

Date Written: September 12, 2005

Abstract

Sell-side analysts face pressure to provide favorable opinions on their employers' investment banking clients and to boost brokerage business, yet institutional investors value unbiased research. Because of their dependence on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to pressure in stocks that are highly visible to their institutional investor constituency. Given the apparent severity of analyst conflicts of interest in the late 1990s, we examine a comprehensive sample of analyst recommendations over the 1994-2000 period. We find that analysts' recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investors in the firm being followed. This is especially true when there are more institutions holding larger blocks in the firm, and for firms whose institutional holdings are concentrated in the hands of the largest institutional investors. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.

Keywords: Analyst recommendations, Analyst forecast accuracy, Investment banking, Conflicts of Interest, Institutional investors, Banking Relationships

JEL Classification: G20, G21, G23, G24

Suggested Citation

Ljungqvist, Alexander and Marston, Felicia C. and Yan, Hong and Starks, Laura T. and Wei, Kelsey D., Conflicts of Interest in Sell-Side Research and the Moderating Role of Institutional Investors (September 12, 2005). Available at SSRN: https://ssrn.com/abstract=649684 or http://dx.doi.org/10.2139/ssrn.649684

Alexander Ljungqvist (Contact Author)

Stockholm School of Economics ( email )

111 60 Stockholm
Sweden

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Felicia C. Marston

University of Virginia - McIntire School of Commerce ( email )

P.O. Box 400173
Charlottesville, VA 22904-4173
United States
804-924-1417 (Phone)

Hong Yan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Laura T. Starks

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

Kelsey D. Wei

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)

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