Optimism Biases Among Brokerage and Non-Brokerage Firms' Equity Recommendations: Agency Costs in the Investment Industry

Financial Management, Spring 1998

Posted: 15 Jun 1998

See all articles by Willard T. Carleton

Willard T. Carleton

University of Arizona

Carl R. Chen

University of Dayton

Thomas L. Steiner

University of Dayton

Multiple version iconThere are 2 versions of this paper

Abstract

This paper studies the investment recommendations made by brokerage and non-brokerage firms in an effort to examine the differential agency costs across three unique recommendation production environments. Using the ACE database, recommendation production environments are categorized into national, regional, and non-brokerage firms. The results prove that differences exist between brokerage and non-brokerage firms: 1) brokerage firms significantly inflate recommendations; 2) regional firms significantly inflate recommendations, compared to national firms; 3)brokerage firms' recommendations, compared to non-brokerage firms' recommendations, are less credible and less predictive of future stock performance; 4) national firms have more reputation capital, therefore, their recommendations are more predictive of investment performance than the regional brokerage firms' recommendations.

JEL Classification: G12, G14

Suggested Citation

Carleton, Willard T. and Chen, Carl R. and Steiner, Thomas L., Optimism Biases Among Brokerage and Non-Brokerage Firms' Equity Recommendations: Agency Costs in the Investment Industry. Financial Management, Spring 1998. Available at SSRN: https://ssrn.com/abstract=94957

Willard T. Carleton (Contact Author)

University of Arizona

Department of History
Tucson, AZ 85721
United States

Carl R. Chen

University of Dayton ( email )

300 College Park
Dayton, OH 45469-2251
United States
937-229-2418 (Phone)
937-229-2477 (Fax)

Thomas L. Steiner

University of Dayton ( email )

300 College Park
Dayton, OH 45469-2251
United States
937-229-2563 (Phone)
937-229-2477 (Fax)

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