Analyst Impartiality and Investment Banking Relationships

Authors: O'BRIEN, PATRICIA C.¹; MCNICHOLS, MAUREEN F.²; HSIOU-WEI, LIN³

Source: Journal of Accounting Research, Volume 43, Number 4, September 2005 , pp. 623-650(28)

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Abstract:

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.

Document Type: Research article

DOI: http://dx.doi.org/10.1111/j.1475-679X.2005.00184.x

Affiliations: 1: University of Waterloo 2: Stanford University 3: National Taiwan University.

Publication date: 2005-09-01