Conflict of Interest and the Credibility of Underwriter Analyst Recommendations

Posted: 26 Apr 1998

See all articles by Roni Michaely

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Kent L. Womack

University of Toronto - Rotman School of Management (Deceased)

Date Written: July 1996

Abstract

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

Michaely, Roni and Womack, Kent L., Conflict of Interest and the Credibility of Underwriter Analyst Recommendations (July 1996). Available at SSRN: https://ssrn.com/abstract=7670

Roni Michaely

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, Geneva 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Kent L. Womack (Contact Author)

University of Toronto - Rotman School of Management (Deceased)

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