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When the payment mode affects the quality of advices. Financial analysts, fund managers, and brokerage commissions

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  • Sébastien GALANTI

Abstract

"Sell-side"analysts advise fund managers with recommendations to buy or sell a stock. But being compensated with commissions proportional to the amount traded can drive the analyst to bias his advice. In a two-agent model, it is notably shown that the probability of a biased equilibrium to occur increases with commission rate, but decreases with the weight of analyst rating. Moreover, the fund manager can cross-check the recommendation with his own signal–this may represent access to an in-house"buy-side analyst". The fund manager does not necessarily follow the sell-side analyst if its own signal is precise enough . The model hence provides a theoretical rationale for recent empirical results about the independance of sell-side analysts.
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  • Sébastien GALANTI, 2008. "When the payment mode affects the quality of advices. Financial analysts, fund managers, and brokerage commissions," LEO Working Papers / DR LEO 1767, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    • Handle: RePEc:leo:wpaper:1767
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    References listed on IDEAS

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    Broker; Financial Analyst;

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