Comparing the Stock Recommendation Performance of Investment Banks and Independent Research Firms

Posted: 15 Dec 2005

See all articles by Brad M. Barber

Brad M. Barber

University of California, Davis

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business

Brett Trueman

University of California, Los Angeles (UCLA) - Anderson School of Management

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Abstract

From January 1996 through June 2003, the average daily abnormal return to independent research firm buy recommendations exceeds that of investment bank buy recommendations by 3.1 basis points (almost 8 percentage points annualized). Investment bank buy recommendation underperformance is more pronounced following the NASDAQ market peak (March 10, 2000) and strikingly so for buy recommendations on firms that recently conducted equity offerings. In contrast, investment bank hold and sell recommendations outperform those of independent research firms by 1.8 basis points daily (4 1/2 percentage points annualized). These results suggest reluctance by investment banks to downgrade stocks whose prospects dimmed during the bear market of the early 2000s, as claimed in the SEC's Global Research Analyst Settlement.

Keywords: Analyst, recommendation, investment bank, independent research, Global Research Analyst Settlement

JEL Classification: G12, G14, G24, G29, G38

Suggested Citation

Barber, Brad M. and Lehavy, Reuven and Trueman, Brett, Comparing the Stock Recommendation Performance of Investment Banks and Independent Research Firms. Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=870030

Brad M. Barber

University of California, Davis ( email )

Graduate School of Management
One Shields Avenue
Davis, CA 95616
United States
530-752-0512 (Phone)
530-752-2924 (Fax)

Reuven Lehavy

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI 48109
United States
734-763-1508 (Phone)
734-936-0282 (Fax)

Brett Trueman (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
310-825-4720 (Phone)
310-267-2193 (Fax)

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