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Analyst firm parent–subsidiary relationship and conflict of interest: evidence from IPO recommendations


  • I am grateful to the editor, Robert Faff, and an anonymous referee for detailed comments and suggestions. I also thank Anup Agrawal, Doug Cook, Benton Gup, Susan Hume, Junsoo Lee, James Ligon, Eric Mundt, Ravi Shukla, Mary Stone, and seminar participants at the 2008 FMA and 2011 EFA meetings for helpful comments. I gratefully acknowledge the contribution of Thomson Financial for providing Broker Recommendations data, available through the Institutional Brokers Estimate System (I/B/E/S). I also thank I/B/E/S for permitting me to use the Recommendation Broker Translation file. All errors are my own.


We uncover a new source for the conflict of interest in analyst coverage existed before the Regulation FD period by examining whether recommendations within the parent–subsidiary (PS) relationship are more optimistic and whether they have better investment value than non-PS recommendations. We find evidence consistent with the conflict of interest: PS analysts on average issue more optimistic recommendations, but their recommendations have worse or no better investment value in the calendar-time portfolio analysis. Analyst firm PS relationship is another source for the conflict of interest in analyst coverage that has not been identified before.