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What Drives Sell-Side Analyst Compensation at High-Status Investment Banks?

Authors

  • BORIS GROYSBERG,

    1. Harvard Business School
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  • PAUL M. HEALY,

    1. Harvard Business School
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  • DAVID A. MABER

    1. USC Marshall School of Business. This research was funded by the Division of Research at Harvard Business School and the USC Marshall School of Business. We wish to thank I/B/E/S for analyst data and, especially, the anonymous financial services firms that provided us with their financial analysts’ compensation data. We also wish to thank Alok Kumar, Douglas Emery, and Xi Li, who generously supplied their Institutional Investor and WSJ star analyst data, and Malcolm Baker and Jeffrey Wurgler for their market sentiment data. Helpful comments were provided by Doug Skinner (editor), an anonymous reviewer, Mark Bagnoli, Jasmijn Bol, Sarah Bonner, Folkert Botma, Jan Bouwens, Mihir Desai, Fabrizio Ferri, Lee Fleming, Joseph Gerakos, Cam Harvey, Kai Li, Kevin J. Murphy, Pat O'Brien, Steve Orpurt, Eddie Riedl, Jenny Tucker, Susan Watts, Michael Welker, and seminar participants at the 2008 Ball & Brown Tribute Conference at the University of New South Wales, 2008 CAAA Doctoral Consortium and 2009 CAAA Annual Meeting, 19th Annual Conference on Financial Economics and Accounting at the University of Texas at Austin, 2008 Financial Management Annual Meeting, 2008 London Business School Trans-Atlantic Doctoral Conference, 2008 Washington Area Finance Conference, 2009 FARS mid-year conference in New Orleans, Boston University, Cornell, HBS, HKUST, Purdue, Singapore Management University, Tilburg, UBC, UNC, USC, and the University of Technology, Sydney. The usual disclaimer applies.
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ABSTRACT

We use proprietary data from a major investment bank to investigate factors associated with analysts’ annual compensation. We find compensation to be positively related to “All-Star” recognition, investment-banking contributions, the size of analysts’ portfolios, and whether an analyst is identified as a top stock picker by the Wall Street Journal. We find no evidence that compensation is related to earnings forecast accuracy. But consistent with prior studies, we find analyst turnover to be related to forecast accuracy, suggesting that analyst forecasting incentives are primarily termination based. Additional analyses indicate that “All-Star” recognition proxies for buy-side client votes on analyst research quality used to allocate commissions across banks and analysts. Taken as a whole, our evidence is consistent with analyst compensation being designed to reward actions that increase brokerage and investment-banking revenues. To assess the generality of our findings, we test the same relations using compensation data from a second high-status bank and obtain similar results.

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