Conflict of Interest and the Credibility of Underwriter Analyst Recommendations

Michaely, Roni; Womack, Kent L.

doi:10.1093/rfs/12.4.653

Cited by 1,369 publications

(783 citation statements)

References 26 publications

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“…For instance, analysts may write reports favoring companies from which their affiliated investment bank could obtain underwriting business in the future (e.g., Michaely and Womack, 1999). It would be interesting to examine this in future studies.…”

Section: Main Hypothesesmentioning

confidence: 99%

Outsourcing Corporate Governance: Conflicts of Interest Within the Proxy Advisory Industry

2018

Management Science

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Proxy advisory firms wield large influence with voting shareholders. However, conflicts of interest may arise when an advisor sells services to both investors and issuers. Using a unique dataset on voting recommendations, I find that for most types of proposals, competition from a new entrant reduces favoritism towards management by an incumbent advisor that serves both corporations and investors. The results are not driven by factors that influence the entrant's coverage decision, such as the marginal cost of new coverage or previously biased recommendations by the incumbent. Similar to other information intermediaries, biased advice by proxy advisors is shown to have real negative consequences, which allow management to enjoy greater private benefits. These results suggest conflicts of interest are a real concern in the proxy advisory industry, and increasing competition could help alleviate them. * I am very grateful for the guidance and support from

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Section: Main Hypothesesmentioning

confidence: 99%

Outsourcing Corporate Governance: Conflicts of Interest Within the Proxy Advisory Industry

2018

Management Science

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“…Analysts working for investment banks are expected to cover stocks of banking clients and face pressure to issue positive recommendations for such firms (see Lin and McNichols, 1998, Michaely and Womack, 1999, Dechow, Hutton and Sloan, 2000, and Lin, McNichols and O'Brien, 2005. 7 In addition, sell-side analysts issue optimistic recommendations to encourage clients to purchase stocks and generate brokerage commissions (see Cowen, Groysberg and Healy, 2006).…”

Section: Conflicts Of Interestmentioning

confidence: 99%

“…3 Michaely and Womack (1999) and Barber, Lehavy and Trueman (2007) find that analysts with investment banking conflicts have less profitable recommendations than those with no such conflicts. Ertimur, Sunder and Sunder (2007) show that the translation of more accurate earnings forecasts into profitable recommendation returns holds only for non-conflicted analysts.…”

Section: Introductionmentioning

confidence: 99%

The Stock Selection and Performance of Buy-Side Analysts

et al. 2013

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Abstract:Prior research on equity analysts focuses almost exclusively on those employed by sellside investment banks and brokerage houses. Yet investment firms undertake their own buy-side research and their analysts face different stock selection and recommendation incentives than their sell-side peers. We examine the selection and performance of stocks recommended by analysts at a large investment firm relative to those of sell-side analysts from mid-1997 to 2004. We find that the buy-side firm's analysts issue less optimistic recommendations for stocks with larger market capitalizations and lower return volatility than their sell-side peers, consistent with their facing fewer conflicts of interest and having a preference for liquid stocks. Tests with no controls for these effects indicate that annualized buy-side Strong Buy/Buy recommendations underperform those for sell-side peers by 5.9% using market-adjusted returns and by 3.8% using four-factor model abnormal returns. However, these findings are driven by differences in the stocks recommended and their market capitalization. After controlling for these selection effects, we find no difference in the performance of the buy-and sell-side analysts' Strong Buy/Buy recommendations.JEL classification: M41, G14, G29

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“…3 Michaely and Womack (1999) also note that proprietary trading can come into conflict with a market maker's best execution responsibility. This seems to be an inherent problem of the Nasdaq microstructure.…”

Section: Discussionmentioning

confidence: 99%

“…Part of this bias reflects potential revenues from investment banking activities. According to Michaely and Womack (1999), lead underwriter analysts issued 50% more buy recommendations. Their recommendations under performed picks by unconflicted analysts by more than 25% per year for two years.…”

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confidence: 99%

Analyst Recommendations and Nasdaq Market Making Activity

Mizrach

2003

SSRN Journal

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Conflict of Interest and the Credibility of Underwriter Analyst Recommendations

Cited by 1,369 publications

References 26 publications

Outsourcing Corporate Governance: Conflicts of Interest Within the Proxy Advisory Industry

Outsourcing Corporate Governance: Conflicts of Interest Within the Proxy Advisory Industry

The Stock Selection and Performance of Buy-Side Analysts

Analyst Recommendations and Nasdaq Market Making Activity

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