how serious are analysts conflicts of interest

1. 1 How Serious Are Analysts� Conflicts of Interest? Leslie Boni, University of New Mexico Kent L. Womack, Tuck School at Dartmouth RESEARCH ANALYSTs are our prime question, motivationRESEARCH ANALYSTs are our prime question, motivation

2. 2 �That�s the great irony of our business. Portfolio managers don�t want us to downgrade stocks.� --DOR at Lehman �That�s the great irony of our business. Portfolio managers don�t want us to downgrade stocks.� --DOR at Lehman

3. 3 What�s the Academic Literature Say about the Conflicts? Affiliated investment bankers are overly optimistic at IPO Michaely and Womack (1999): �Conflict of Interest and the Credibility of Underwriter Analyst Recommendations,� Review of Financial Studies Analysts are an important factor when companies pick bankers Krigman, Shaw, and Womack (2001): �Why Do Firms Switch Underwriters?� Journal of Financial Economics Analysts are optimistic to obtain access to management Lim (2001): �Rationality and Analysts� Forecast Bias,� Journal of Finance Optimistic analysts are more likely to move to better firms Hong and Kubik (2003): �Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts.� Journal of Finance

4. 4 �Analysts, Industries, and Price Momentum� (Boni and Womack, 2003) Can analysts rank future winners and losers in their industry? Analysts are industry specialists. Proper test of stock-picking ability is an industry-based analysis. Analysts signal rankings with upgrades and downgrades. Examine self-financing portfolios (long net upgraded stocks, short net downgraded stocks). Dataset: U.S. stocks. ~150,000 recommendations on 7,766 companies from 433 brokerages. Time period: Jan. 1996 � June 2001. Findings: Analysts can rank stocks: Returns 1.4% per mo., 18% per yr . Returns are better if stocks have fewer analysts covering them. �That�s the great irony of our business. Portfolio managers don�t want us to downgrade stocks.� --DOR at Lehman �That�s the great irony of our business. Portfolio managers don�t want us to downgrade stocks.� --DOR at Lehman

5. 5 �Analysts, Industries, and Price Momentum� (Boni and Womack, 2003)

6. 6 The Value of Analyst Research:Retail versus Institutional Investors� Perspectives Boni and Womack (2003): Financial Analysts Journal, forthcoming How do we reconcile: Institutional investors say they still value analysts� research despite the potential for conflicts of interest. Retail investors complained analysts didn�t get them out of tech stocks post-market highs. Dataset: U.S. stocks. ~150,000 recommendations on 7,766 companies from 433 brokerages. Time period: Jan. 1996 � June 2001 About 50% of recommendations are from largest 25 firms Industry categories: S&P/Morgan Stanley GICS codes. �That�s the great irony of our business. Portfolio managers don�t want us to downgrade stocks.� --DOR at Lehman �That�s the great irony of our business. Portfolio managers don�t want us to downgrade stocks.� --DOR at Lehman

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8. 8 Figure 1 Consensus Levels: Software Industry and Microsoft

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13. 13 Is independent research better?Is brokerage without investment banking better? �That�s the great irony of our business. Portfolio managers don�t want us to downgrade stocks.� --DOR at Lehman �That�s the great irony of our business. Portfolio managers don�t want us to downgrade stocks.� --DOR at Lehman

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