We study the effect of the Global Analyst Research Settlement and related regulations on sell-side research. These regulations attempted to mitigate the interdependence between research and investment banking. We document that following the regulations many brokerage houses have migrated from the traditional five-tier rating system to a three-tier system. Optimistic recommendations have become less frequent and more informative, whereas neutral and pessimistic recommendations have become more frequent and less informative. Importantly, the overall informativeness of recommendations has declined. The likelihood of issuing optimistic recommendations no longer depends on affiliation with the covered firm, although affiliated analysts are still reluctant to issue pessimistic recommendations.
analysts’ reports, stock recommendations, regulations
Corporate Finance | Portfolio and Security Analysis
Review of Financial Studies
Oxford University Press
KADAN, Ohad; MADURERIA, Leonardo; WANG, Rong; and ZACH, Tzachi.
Conflicts of Interest and Stock Recommendations: The Effects of the Global Settlement and Related Regulations. (2009). Review of Financial Studies. 22, (10), 4189-4217. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/781