The usual suspects: Investment Banks' Recommendations and Emerging Markets

The paper addresses two core questions: do recommendations have an impact on the allocation of flows in the asset class? Above all, are we facing in this asset class major problems of asymmetries of information? In order to answer these questions, we used untapped and rich datasets. We constructed a unique database covering the period 1997-2006 for all the bond recommendations by the major Wall Street and City investment banks that dominate the emerging bond markets. The most important and relevant results are as follows. First, 90% of the underwriters recommend, at the announcement date of the issue, to buy or to maintain in their portfolio the bonds issued by the countries where they are acting as lead managers. Second, there is an additional bias, investment banks' recommendations depend also on the relative size of the secondary bond market. In fact, there is a phenomenon that we call "too big to underwrite" meaning that investment banks do not send negative signals to investors of countries that, given their size, are considered important for their business. Finally, by using a simple cross-section analysis, we found that the impact of investment banks' recommendations on capital flows is more significant and more predictable than some macroeconomic variables such as interest rates, economic growth and inflation.