Businessweek Archives

Analysts And Brokers: Too Close For Comfort?


Economic Trends

ANALYSTS AND BROKERS: TOO CLOSE FOR COMFORT?

Federal law requires full-service stock brokerage firms to erect a "Chinese wall" between their investor services and investment banking operations. Yet the scuttlebutt on Wall Street is that financial analysts who work for such firms often tend to portray a company more favorably if it's a client of the firm's investment banking department.

That notion is the thesis of a new study by Amitabh Dugar and Siva Nathan of Michigan State University's Eli Broad Graduate School of Management. The study reviewed reports covering 256 companies issued by stock analysts working for 54 brokerage firms in the 1983-86 period. In essence, it compared investment reports issued by firms that had investment banking relationships with the companies being analyzed with similar reports issued about the same time by firms with no such ties.

The study found that stock analysts were significantly more optimistic about a company's future prospects if it also happened to be an investment banking client of their employer. They tended both to project higher earnings and to issue stronger buy recommendations.

While such optimistic bias may stem from a desire to please a firm's clients, the study found no relationship between the degree of optimism exuded by a report and the size of the company being analyzed--a clue to the size of potential fees. What's more, it found that stock movements were more influenced by nonbiased forecasts than those issued by firms assessing their own clients.

"In other words," says Nathan, "the market isn't fooled by such analysts' excessive optimism. It takes their views with a healthy grain of salt."GENE KORETZ


Toyota's Hydrogen Man
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus