NASD Rule 2711 and Changes in Analysts' Independence in Making Stock Recommendations

Publication Type

Journal Article

Publication Date

7-2009

Abstract

This study provides evidence of changes in how analysts generate stock recommendations after the SEC's approval of NASD Rule 2711 in May 2002, which introduced regulatory reforms to enhance the independence of analysts' research. We investigate the relations of analysts' stock recommendations with intrinsic value estimates (based on analysts' earnings forecasts relative to the stock prices, V/P) and with investment-banking-related conflicts of interest during the 1994–2005 period. We find a stronger relation between analysts' stock recommendations and V/P and a weaker relation between analysts' stock recommendations and conflicts of interest in the post-Rule period than prior to the implementation of the Rule. Moreover, the increases in the relation between stock recommendations and V/P after the implementation of the Rule are greater for the stocks recommended by analysts with greater potential conflicts of interest. Our findings suggest that the implementation of Rule 2711 has enhanced analysts' independence.

Discipline

Accounting | Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Financial Performance Analysis

Publication

Accounting Review

Volume

84

Issue

4

First Page

1041

Last Page

1071

ISSN

0001-4826

Identifier

10.2308/accr.2009.84.4.1041

Publisher

American Accounting Association

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