Trade Generation, Reputation, and Sell-Side Analysts



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    • Andrew Jackson is at Barclays Global Investors, Sydney, Australia. This paper is a modified version of a chapter of my doctoral thesis completed at London Business School. I thank Harjoat Bhamra, Richard Brealey, Denis Gromb, Paul Irvine, Terrance Odean, Marco Ottaviani, Stefano Rossi, Michael Ulm, Hongjun Yan, Robert Stambaugh (the editor), an anonymous referee, my BGI colleagues, seminar participants at London Business School and UNSW, and especially my PhD supervisor Timothy Johnson for valuable comments and suggestions. Jennifer Jackson provided brilliant editing assistance. I thank Nick Coles for providing the extensive survey data used in this research and an anonymous broker and I/B/E/S for making their data available for academic use. I am responsible for any errors.


This paper examines the trade-generation and reputation-building incentives facing sell-side analysts. Using a unique data set I demonstrate that optimistic analysts generate more trade for their brokerage firms, as do high reputation analysts. I also find that accurate analysts generate higher reputations. The analyst therefore faces a conflict between telling the truth to build her reputation versus misleading investors via optimistic forecasts to generate short-term increases in trading commissions. In equilibrium I show forecast optimism can exist, even when investment-banking affiliations are removed. The conclusions may have important policy implications given recent changes in the institutional structure of the brokerage industry.