The Effectiveness of Reputation as a Disciplinary Mechanism in Sell-Side Research

We examine whether the quality differentials in earnings forecasts between reputable and nonreputable analysts vary with the severity of conflicts of interest. We measure personal reputation using the Institutional Investor All-American (AA) awards, and bank reputation using Carter-Manaster ranks. W...

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Bibliographic Details
Published in:The Review of financial studies 2009-09, Vol.22 (9), p.3735-3777
Main Authors: Fang, Lily, Yasuda, Ayako
Format: Article
Language:English
Subjects:
Analytical forecasting
Bank markets
Banks
Business reputation
Coefficients
Compensation
Conflicts of interest
Earnings
Earnings forecasting
Economic forecasts
Equity
Financial analysis
Financial research
Insurance underwriting
Investment advisors
Investment banking
New employees
Publishing
Reputations
Securities industry
Statistical forecasts
Stock prices
Stockbrokers
Studies
Underwriting
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Summary:We examine whether the quality differentials in earnings forecasts between reputable and nonreputable analysts vary with the severity of conflicts of interest. We measure personal reputation using the Institutional Investor All-American (AA) awards, and bank reputation using Carter-Manaster ranks. While both personal and bank reputation are associated with higher quality forecasts overall, their effectiveness against conflicts of interest differs. The severity of conflicts has a negative and significant effect on the performance of non-AAs at top-tier banks relative to other analysts, while it has a positive and significant effect on the performance of AAs at top-tier banks relative to others. Thus personal reputation is an effective disciplinary device against conflicts of interest, while bank reputation alone is not.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhn116