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Prior research has shown that sell-side analysts in general, and especially those facing conflicts of interest driven by investment bank relationships, issue overly optimistic recommendations. This paper studies the effect of regulations on sell-side analysts’ research. These regulations — Rule NASD 2711, Rule NYSE 472, and the “Global Analyst Research Settlement” — attempted to mitigate the interdependence between the research and the investment bank departments of US brokerage houses. The results suggest that the regulations have partially achieved their goal of curbing the conflicts of interest’s influence over analysts’ stock recommendations. After the adoption of the new regulations, the likelihood of receiving an optimistic recommendation no longer depends on whether the firm had undergone IPO/SEO or whether the brokerage house had participated in any such IPO/SEO as an underwriter. However, analysts are still reluctant to issue pessimistic recommendations for IPO/SEO firms, and affiliated analysts are even more reluctant to be pessimistic about these stocks. We also report an overall change in the distribution of recommendations issued by brokerage houses after the new regulations took effect, in which they leaned towards less optimistic recommendations.


Finance and Financial Management


AFA Meeting (Paper on Program)

City or Country


Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.