Erik Devos is the Wells Fargo Professor of Financial Services and Professor at the University of Texas at El Paso, in El Paso, TX.
Are Analysts’ Recommendations for Other Investment Banks Biased?
Article first published online: 26 DEC 2013
© 2013 Financial Management Association International.
Volume 43, Issue 2, pages 327–353, Summer 2014
How to Cite
Devos, E. (2014), Are Analysts’ Recommendations for Other Investment Banks Biased?. Financial Management, 43: 327–353. doi: 10.1111/fima.12031
I thank two anonymous referees Gauri Bhat (AAA discussant), Liz Devos, Bill Elliott, Srinivasan Krishnamurthy, Stephannie Larocque, Rajesh Narayanan, Andrew Prevost Raghu Rau (editor), Keke Song (FMA discussant), and seminar participants at the University of New Mexico, the University of Texas at El Paso, AAA meetings, and FMA meetings for valuable comments. I would like to thank He Li, Shofiqur Rahman, and Jim Schneringer for providing excellent research assistance and Wendy Jennings for providing editing services. I gratefully acknowledge the contribution of Thomson Financial for providing earnings per share forecast data available through the Institutional Brokers Estimate System. This data have been provided as part of a broad academic program to encourage earnings expectations.
- Issue published online: 4 JUN 2014
- Article first published online: 26 DEC 2013
- Accepted manuscript online: 19 JUL 2013 05:44AM EST
This paper provides evidence of a “Potential conflict of interest by equity analysts” who issue recommendations for investment banks that are related to their own bank through syndication. Analysts issue significantly more optimistic recommendations for investment banks with which their bank is syndicated. Recommending banks upgrade their recommendations just before a relation is initiated, suggesting that they use analyst optimism as a means of currying favor with the syndicate lead in hopes of being invited to join. It also appears that as part of a quid pro quo of sorts, relatively optimistic recommendations are rewarded with more syndicate appointments in the year after the recommendations.