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Investment banking relationships and analyst affiliation bias: The impact of the global settlement on sanctioned and non-sanctioned banks

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  • Corwin, Shane A.
  • Larocque, Stephannie A.
  • Stegemoller, Mike A.

Abstract

We examine the impact of the Global Settlement on affiliation bias in analyst recommendations. Using a broad measure of investment bank-firm relationships, we find a substantial reduction in analyst affiliation bias following the settlement for sanctioned banks. In contrast, we find strong evidence of bias both before and after the settlement for affiliated analysts at non-sanctioned banks. Our results suggest that the settlement led to an increase in the expected costs of issuing biased coverage at sanctioned banks, while concurrent self-regulatory organization rule changes were largely ineffective at reducing the influence of investment banking on analyst research at large non-sanctioned banks.

Suggested Citation

  • Corwin, Shane A. & Larocque, Stephannie A. & Stegemoller, Mike A., 2017. "Investment banking relationships and analyst affiliation bias: The impact of the global settlement on sanctioned and non-sanctioned banks," Journal of Financial Economics, Elsevier, vol. 124(3), pages 614-631.
    • Handle: RePEc:eee:jfinec:v:124:y:2017:i:3:p:614-631
    DOI: 10.1016/j.jfineco.2017.03.005
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    11. Bingxu Fang & Ole-Kristian Hope & Zhongwei Huang & Rucsandra Moldovan, 2020. "The effects of MiFID II on sell-side analysts, buy-side analysts, and firms," Review of Accounting Studies, Springer, vol. 25(3), pages 855-902, September.
    12. Barbara A. Bliss & Joseph Engelberg & Mitch Warachka, 2021. "Affiliation bias in the online market for rental accommodation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(1), pages 224-266, March.
    13. Hyoseok (David) Hwang, 2021. "Changes in trading behavior of analyst‐affiliated institutions: the impact of the global analyst research settlement," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 30(3), pages 65-83, August.
    14. Daniel Bradley & Russell Jame & Jared Williams, 2022. "Non‐Deal Roadshows, Informed Trading, and Analyst Conflicts of Interest," Journal of Finance, American Finance Association, vol. 77(1), pages 265-315, February.
    15. Tiana Lehmer & Ben Lourie & Devin Shanthikumar, 2022. "Brokerage trading volume and analysts’ earnings forecasts: a conflict of interest?," Review of Accounting Studies, Springer, vol. 27(2), pages 441-476, June.
    16. Andreas Charitou & Irene Karamanou, 2020. "Sleeping with the enemy: should investment banks be allowed to engage in prop trading?," Review of Accounting Studies, Springer, vol. 25(2), pages 513-557, June.
    17. Andrew C. Call & Nathan Y. Sharp & Paul A. Wong, 2019. "Changes in analysts’ stock recommendations following regulatory action against their brokerage," Review of Accounting Studies, Springer, vol. 24(4), pages 1184-1213, December.
    18. Agam Shah & Arnav Hiray & Pratvi Shah & Arkaprabha Banerjee & Anushka Singh & Dheeraj Eidnani & Sahasra Chava & Bhaskar Chaudhury & Sudheer Chava, 2024. "Numerical Claim Detection in Finance: A New Financial Dataset, Weak-Supervision Model, and Market Analysis," Papers 2402.11728, arXiv.org, revised Oct 2024.
    19. Yen-Jung Tseng & Mark Wilson, 2020. "Changes in Recommendation Rating Systems, Analyst Optimism, and Investor Response," Journal of Business Ethics, Springer, vol. 166(2), pages 369-401, October.
    20. Stefano Cassella & Benjamin Golez & Huseyin Gulen & Peter Kelly & Stefano Giglio, 2023. "Horizon Bias and the Term Structure of Equity Returns," The Review of Financial Studies, Society for Financial Studies, vol. 36(3), pages 1253-1288.
    21. Pacelli, Joseph, 2019. "Corporate culture and analyst catering⁎," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 120-143.
    22. Li, Yi & Zhang, Wei & Wang, Pengfei, 2021. "Working online or offline: Which is more effective?," Research in International Business and Finance, Elsevier, vol. 58(C).
    23. Dambra, Michael & Field, Laura Casares & Gustafson, Matthew T. & Pisciotta, Kevin, 2018. "The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 302-330.
    24. Buslepp, William L. & Casey, Ryan J. & Huston, G. Ryan, 2024. "Independent analyst research: Does it matter who pays?," Advances in accounting, Elsevier, vol. 66(C).

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    More about this item

    Keywords

    Analysts; Recommendations; Investment banking; Investment banking relationships;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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