Conflict of Interest and the Credibility of Underwriter Analyst Recommendations
Posted: 26 Apr 1998
Date Written: July 1996
Brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public. These "booster shots," as they are called in the financial press, may constitute a conflict of interest between an investment bank's fiduciary responsibility to its investing clients (to make accurate recommendations) and its incentive to market the stocks it underwrites. Indeed, we show that the stocks that underwriters recommend perform poorly (compared to "buy" recommendations by unaffiliated underwriters) prior to, at the time of, and subsequent to the recommendation date. Our results are evidence of the substantial conflicts of interest inherent in the different functions investment bankers perform, and demonstrate that these conflicts bias their views and recommendations of the firms they take public. We show that the market does not recognize the full extent of this bias.
JEL Classification: G24, G14
Suggested Citation: Suggested Citation