DP5001 Conflicts of Interest in Sell-Side Research and the Moderating Role of Institutional Investors

Author(s): Alexander P. Ljungqvist, Felicia Marston, Laura T Starks, Kelsey D. Wei, Hong Yan
Publication Date: April 2005
Keyword(s): analyst forecast accuracy, analyst recommendations, banking relationships, conflicts of interest, institutional investors, investment banking
JEL(s): G20, G21, G23, G24
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5001

Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994-2000 period, we find that analysts? recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.