Analyst Impartiality and Investment Banking Relationships

52 Pages Posted: 2 May 2005

See all articles by Patricia C. O'Brien

Patricia C. O'Brien

University of Waterloo

Maureen F. McNichols

Stanford University

Hsiou-Wei Lin

National Taiwan University

Date Written: April 2005


This study examines whether investment banking ties influence the speed with which analysts convey unfavorable news. We hypothesize that affiliated analysts have incentives to respond promptly to good news but prefer not to issue bad news about client companies. Using duration models of the time between an equity issue and the first downgrade, we find affiliated analysts are slower to downgrade from "Buy" and "Hold" recommendations and significantly faster to upgrade from "Hold," in both within-analyst and within-issuer tests. We also find affiliated analysts issue recommendations sooner and more frequently after an offering than unaffiliated analysts, and that unaffiliated analysts are more likely than affiliated analysts to drop coverage of sample firms. Our findings indicate that banking ties increase analysts' reluctance to reveal negative news, and that reform efforts must carefully consider the incentives of affiliated and unaffiliated analysts to initiate coverage and convey the results of their research.

Keywords: Analyst, investment banking, stock recommendation, incentives, equity offerings

JEL Classification: G10, G14, G18, G24, G29

Suggested Citation

O'Brien, Patricia C. and McNichols, Maureen F. and Lin, Hsiou-Wei, Analyst Impartiality and Investment Banking Relationships (April 2005). Available at SSRN: or

Patricia C. O'Brien

University of Waterloo ( email )

200 University Avenue, West
Waterloo, Ontario N2L 3G1
1-519-888-4567 (Phone)
1-519-888-7562 (Fax)

Maureen F. McNichols (Contact Author)

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

Hsiou-Wei Lin

National Taiwan University ( email )

1 Sec. 4, Roosevelt Road
Taipei, 106

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