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how serious are analysts conflicts of interest

2. So Far: Hearings, Settlements, and Rules Changes. Summer 2001 Congressional Hearings:

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how serious are analysts conflicts of interest

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    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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