Analysts Recommendations and Conflict of Interest

29 Pages Posted: 2 Jan 2006

See all articles by Enrico Maria Cervellati

Enrico Maria Cervellati

Department of Management - Ca' Foscari University of Venice

Antonio Carlo Francesco Della Bina

University of Bologna - Department of Management

Abstract

The objectives of the present research is to verify the degree of reliability of financial analysts' recommendations on IPOs in the Italian stock market and to measure their long-run performance distinguishing between the category to which the analyst belongs. In particular, we want to verify the hypothesis that analysts that work for the financial intermediary that has taken public the company, so-called affiliated analysts, have the incentive to issue positive recommendations on the IPOs irrespectively of the quality of the company, in contrast to the alternative hypothesis of information advantage of affiliated analysts compared to non-affiliated ones. The difference in performance of the IPOs recommended by the two types of analysts is statistically significant in magnitude both after one year (a difference of 43% if measured with Cumulative Abnormal Returns, and about 39% if measures by Buy-and-Hold Returns) and after two years from the IPO date (CAR 45%, BHR 39%). This result suggests a potential conflict of interest between the responsibility of the financial analyst towards her clients to issue accurate reports and the incentive to benefit the companies that are clients of the intermediary for which they work, whereas it seems not to be consistent with the alternative hypothesis of information advantage, given the poor performance of the IPO that they recommend.

Keywords: Initial Public Offerings, Brokerage Analysts, Conflict of Interests, Market Reaction, Long-run Performance, Michaely-Womack

JEL Classification: G30, G32

Suggested Citation

Cervellati, Enrico Maria and Della Bina, Antonio Carlo Francesco, Analysts Recommendations and Conflict of Interest. Available at SSRN: https://ssrn.com/abstract=873052 or http://dx.doi.org/10.2139/ssrn.873052

Enrico Maria Cervellati

Department of Management - Ca' Foscari University of Venice

Fondamenta San Giobbe 873 Cannaregio
Venice, Venice 30121
Italy

Antonio Carlo Francesco Della Bina (Contact Author)

University of Bologna - Department of Management ( email )

Piazza Scaravilli 1
Bologna, Bologna 40126
Italy

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