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Changes in analysts’ stock recommendations following regulatory action against their brokerage

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  • Andrew C. Call

    (Arizona State University)

  • Nathan Y. Sharp

    (Texas A&M University)

  • Paul A. Wong

    (University of California)

Abstract

Despite the importance of sell-side analysts in the capital markets, we know little about the effectiveness of routine monitoring of the sell-side industry. We examine the attributes of sell-side research issued by analysts before and after their brokerage faces regulatory sanctions. We find that after a sanction, analysts at sanctioned brokerages lower their stock recommendations, both in absolute terms and relative to the recommendations of other analysts following the same firms. These analysts are also more likely than analysts at other brokerages to downgrade a company’s stock after the receipt of unfavorable information about the firm. Importantly, we document that analysts at nonsanctioned brokerages also reduce the optimism of their stock recommendations when a peer analyst’s brokerage is sanctioned, consistent with spillovers as a result of routine regulatory monitoring. Our study provides evidence that regulatory action against sell-side brokerages is associated with a reduction in sell-side analysts’ positive bias.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:reaccs:v:24:y:2019:i:4:d:10.1007_s11142-019-09506-y
    DOI: 10.1007/s11142-019-09506-y
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    References listed on IDEAS

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    Cited by:

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    2. Petya Platikanova, 2023. "The Real Effects of Analyst Research Quality: Evidence from the Adoption of the Broker Protocol," Australian Accounting Review, CPA Australia, vol. 33(3), pages 237-261, September.
    3. Jia Li & Zhoutianyang Sun, 2023. "Cost stickiness, earnings forecast accuracy, and the informativeness of stock prices about future earnings: evidence from China," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-16, December.

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