When the payment mode affects the quality of advices. Financial analysts, fund managers, and brokerage commissions

"Sell-side"analysts advise fund managers with recommendations to buy or sell a stock. But being compensated with commissions proportional to the amount traded can drive the analyst to bias his advice. In a two-agent model, it is notably shown that the probability of a biased equilibrium to occur increases with commission rate, but decreases with the weight of analyst rating. Moreover, the fund manager can cross-check the recommendation with his own signal–this may represent access to an in-house"buy-side analyst". The fund manager does not necessarily follow the sell-side analyst if its own signal is precise enough . The model hence provides a theoretical rationale for recent empirical results about the independance of sell-side analysts.Financial Analysts, Brokerage, Stock Recommendations.

Affiliated mutual funds and analyst optimism

Prior studies have shown that investment banking affiliations place pressure on analysts to produce optimistic recommendations on the investment bank’s stock-clients. Our analysis of a large sample of recommendations issued from 1995 through 2003 indicates that a mutual fund affiliation also affects analysts’ research. That is, analysts are likely to look favorably at stocks held by the affiliated mutual funds. Controlling for a variety of factors including the investment banking affiliation, we find that the greater the portfolio weight of a stock for the affiliated mutual funds, the more optimistic the analyst rating becomes when compared to the consensus. Reputation partly restrains the optimism of analyst recommendations. In fact, the presence of other institutional investors as shareholders of the recommended stocks curbs analyst optimism. Nevertheless, from 1999 through 2001, star analysts report the most optimism when they recommend stocks in the portfolios of affiliated mutual funds.Mutual funds ; Investment banking

Analyst Ratings for Firms Filing and Reorganizing Under Chapter 11

Purpose The purpose of this paper is to examine analyst followings of firms starting from one year prior to their filing for Chapter 11 and as the firms progress through bankruptcy proceedings with a focus on firms receiving “Hold” or better recommendations. The authors attempt to answer questions such as what the common characteristics of the firms receiving stronger than expected recommendations one year prior to filing for bankruptcy reorganization or while in bankruptcy are, and how the market reacts to the issuance of stronger ratings for those firms. Design/methodology/approach The authors design various regressions and apply them to a total of 2,754 sell-side analyst recommendations and 325 firms that are either approaching bankruptcy filing or in the process of reorganizing. In each analysis, the authors control for several firm and performance characteristics. Findings The authors find that the probability of securing stronger ratings is higher for small firms and for those followed by a greater number of analysts than for large firms and firms followed by fewer analysts. The market becomes more skeptical of optimistic evaluations closer to the date of bankruptcy filing (perhaps reflecting some anticipation) and reacts more positively to rating upgrades issued during bankruptcy protection than to the upgrades issued before the bankruptcy filing. Research limitations/implications The conclusions are based on the analysis of analyst recommendations issued shortly before Chapter 11 filings and during bankruptcy proceedings. The conclusions could be strengthened by further analysis of firms’ post-bankruptcy recovery and performance and examination of analyst recommendations issued for the firms after they emerge from Chapter 11.. Practical implications Analyst security ratings that are more positive than expected are perhaps the result of superior expertise and access to private information. During bankruptcy proceedings, when information disclosure is limited, investors could greatly benefit from reports issued by security analysts. Originality/value This study contributes to the literature in a number of ways. First, the authors contribute to the literature on the analyst ratings of firms in distress by considering the period between bankruptcy filing and emergence, while the existing literature provides analysis of pre-bankruptcy recommendations and forecasts. Second, the authors focus on better than expected ratings rather than all types of ratings as the firms approach bankruptcy filings and proceed through reorganization. Finally, they evaluate how investors react to stronger than expected analyst ratings

How Do Analyst Recommendations Respond to Major News?

We examine how analysts respond to public information when setting stock recommendations. We model the determinants of analysts’ recommendation changes following large stock price movements. We find evidence of an asymmetry following large positive and negative returns. Following large stock price increases, analysts are equally likely to upgrade or downgrade. Following large stock price declines, analysts are more likely to downgrade. This asymmetry exists after accounting for investment banking relationships and herding behavior. This result suggests recommendation changes are “sticky” in one direction, with analysts reluctant to downgrade. Moreover, this result implies that analysts’ optimistic bias may vary through time

The Impact of Voluntary Disclosures on Sell-Side Analyst Stock Recommendations: Australian Experience

This paper investigates the impact of voluntary disclosures on sell-side analyst stock recommendations. It uses content analysis method to measure quality of information disclosures and emphasis on particular themes. The focus of this study is on changes in analyst recommendations and the new information disclosures that have been made public since the previous revision of recommendation. The proxies for voluntary disclosures are information released by firms via company announcements and associated media reports. The characteristics of these disclosures are examined to explore their impact on the changes in analystsÌ stock recommendations. Based on a sample of over 200 recommendation revisions of 40 listed Australian companies, the results suggest that voluntary disclosures do contribute to analyst stock revisions. The findings reveal that the quantity of disclosures is positively associated with the number of recommendation revisions, and that disclosures with favourable signals or with price-sensitive contents are significantly related to the direction and type of analyst revisions. In addition, disclosure of specific themes (e.g., dividend and product) in company announcements and news are significantly associated with the recommendation change. This has implications for both the formulation of accounting policies and the regulation of financial disclosure. Acknowledgements: The authors acknowledge the support of Thomson Financial in the conduct of this research through their provision of data from the Institutional Brokers Estimate System (I/B/E/S) service. This data has been provided as part of a broad academic program to encourage earnings expectation research. The authors acknowledge the helpful comments from participants at the BAA Annual Conference (2004), University of York.Thai takeovers, bidding firms, control portfolios, bootstrapped t-tests

Rewriting History

We document widespread ex post changes to the historical contents of the I/B/E/S analyst stock recommendations database. Across a sequence of seven downloads of the entire I/B/E/S recommendations database, obtained between 2000 and 2007, we find that between 6,594 (1.6%) and 97,579 (21.7%) of matched observations are different from one download to the next. The changes, which include alterations of recommendation levels, additions and deletions of records, and removal of analyst names, are non-random in nature: They cluster by analyst reputation, brokerage firm size and status, and recommendation boldness. The changes have a large and significant impact on the classification of trading signals and back-tests of three stylized facts: The profitability of trading signals, the profitability of changes in consensus recommendations, and persistence in individual analyst stock-picking ability