Analyst Impartiality and Investment Banking Relationships


  • The authors gratefully acknowledge the financial support of National Taiwan University, Stanford Graduate School of Business, the University of Waterloo, the Social Sciences and Humanities Research Council of Canada, and the Certified General Accountants of Canada through the Canadian Academic Accounting Association. We are grateful to First Call for the use of recommendation data, and to Qintao Fan and Yinnan Wang for research assistance. We have benefited from the comments of an anonymous reviewer; from seminar participants at the Universities of Waterloo and British Columbia, Baruch College, the Harvard Business School 2003 Information, Markets and Organizations conference, the London Business School 2004 Accounting Symposium, Queen's University; and particularly from Jerry Lawless.


This study examines whether investment banking ties influence the speed with which analysts convey unfavorable news. We hypothesize that affiliated analysts have incentives to respond promptly to good news but prefer not to issue bad news about client companies. Using duration models of the time between an equity issue and the first downgrade, we find affiliated analysts are slower to downgrade from Buy and Hold recommendations and significantly faster to upgrade from Hold recommendations, in both within-analyst and within-issuer tests. We also find affiliated analysts issue recommendations sooner and more frequently after an offering than unaffiliated analysts, and that unaffiliated analysts are more likely than affiliated analysts to drop coverage of sample firms. Our findings indicate that banking ties increase analysts' reluctance to reveal negative news, and that reform efforts must carefully consider the incentives of affiliated and unaffiliated analysts to initiate coverage and convey the results of their research.