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Conflicts of Interest and Research Quality of Affiliated Analysts in the German Universal Banking System: Evidence from IPO Underwriting


  • The authors would like to thank Tim Jenkinson (the editor of this issue) and an anonymous referee for valuable suggestions. We also thank the participants at the 2005 symposium on Finance, Banking and Insurance in Karlsruhe, the 2006 European Financial Management Association Meeting in Madrid, the 2006 Tor Vergata Conference in Rome, and the 2008 European Financial Management Association Meeting on IPOs in Oxford for their comments and discussion. We are also grateful to Julian Holler and Martin Seim for their research support. All analyst forecasts, analyst recommendations, equity prices as well as all other data were provided by FactSet JCF. We thank FactSet JCF for the excellent support of our research.


The quality of equity research by financial analysts is a prerequisite for an efficient capital market. This study investigates the quality of earnings forecasts and stock recommendations for initial public offerings (IPOs) in Germany. The empirical study includes 12,605 earnings forecasts and 6,209 stock recommendations of individual analysts for the time period from 1997 to 2004. The focus of this study is on analysing the potential conflicts of interest that arise when the analyst is affiliated with the underwriter of an IPO. In a universal banking system these conflicts of interest are usually more pronounced and therefore interesting to investigate. The empirical findings for the German financial market suggest that earnings forecasts and stock recommendations of the analysts belonging to the lead-underwriter are on average inaccurate and biased, indicating some conflicts of interest. Moreover, the stock recommendations of the analysts that are affiliated with the lead-underwriter are often too optimistic resulting in a significant long-run underperformance for the investor. In contrast, unaffiliated analysts provide better earnings forecasts and stock recommendations that result in a superior performance for the investor.