Banking relationships and sell-side research

This paper examines disclosures by sell-side analysts when their institution has a lending relationship with the firms being covered. Lending-affiliated analysts’ earnings forecasts are found to be more accurate relative to forecasts by other analysts but this differential accuracy manifests itself only after the advent of the loan. Despite this increased earnings forecast accuracy, lending-affiliated analysts exhibit undue optimism in their brokerage recommendations and forecasts of long term growth. The optimism exists both before and after the lending commences. The evidence suggests that any insights into the covered firm via thelending relationship are employed by bank analysts in a selective manner. They appear unwilling to compromise on disclosures where expost accuracy is clearly revealed, possibly to preserve their own personal reputation. However, they are overly optimistic on other disclosures where resolution is less readily verifiable, possibly to promote their lending client’s financial standing.Forecasting ; Investment banking

Banking relationships and sell-side research

Abstract Prior literature argues that significant benefits accrue to the lender from relationship banking and that commercial banks have privileged access to a firm's private information as a consequence of their lending arrangements. We examine whether "related" analysts with commercial lending ties with a client have an informational edge. Specifically, we explore whether such related sell-side research is likely to produce more accurate forecasts. We provide evidence that the presence of a lending relationship between a bank and a firm is indeed associated with more accurate forecasts by the bank's analyst for that firm. A similar effect is found with respect to analysts related to the firm via past underwriting relationships. Furthermore, analysts with an underwriting connection and all-star analysts, but not the analysts with a lending connection, appear to be "leaders" in the sense of having other analysts herding on their forecasts suggesting that a commercial bank's relations with a firm are perhaps less public and have not garnered as much attention. Our findings indicate that there are informational advantages for related sell-side analysts. * We are grateful t