IDEAS home Printed from https://ideas.repec.org/a/kap/iaecre/v20y2014i4p369-38410.1007-s11294-014-9484-x.html
   My bibliography  Save this article

Analyst Recommendations and Regulation: Scopes for European Policy Makers to Enhance Investor Protection

Author

Listed:
  • Andreas Höfer
  • Andreas Oehler

Abstract

Investors rely on analyst recommendations when making investment decisions. Over the last few years, however, sell-side analysts have caught the attention of the supervisory authorities given their vulnerability to numerous conflicts of interest. In this paper, we empirically examine relevant regulatory measures that have an impact upon analysts’ activities, namely the market abuse directive and markets in financial instruments directive. We find that European regulators have primarily focused on mitigating conflicts of interest. However, to establish an environment of more sophisticated investor protection additional regulatory effort is required. Therefore, in this paper, we provide related empirical evidence and discuss proposals to correct regulatory shortcomings in order to strengthen investor protection in the European Union. Copyright International Atlantic Economic Society 2014

Suggested Citation

  • Andreas Höfer & Andreas Oehler, 2014. "Analyst Recommendations and Regulation: Scopes for European Policy Makers to Enhance Investor Protection," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 20(4), pages 369-384, November.
    • Handle: RePEc:kap:iaecre:v:20:y:2014:i:4:p:369-384:10.1007/s11294-014-9484-x
    DOI: 10.1007/s11294-014-9484-x
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s11294-014-9484-x
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11294-014-9484-x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Womack, Kent L, 1996. "Do Brokerage Analysts' Recommendations Have Investment Value?," Journal of Finance, American Finance Association, vol. 51(1), pages 137-167, March.
    2. Malmendier, Ulrike & Shanthikumar, Devin, 2007. "Are small investors naive about incentives?," Journal of Financial Economics, Elsevier, vol. 85(2), pages 457-489, August.
    3. Kim, Sok Tae & Lin, Ji-Chai & Slovin, Myron B., 1997. "Market Structure, Informed Trading, and Analysts' Recommendations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(4), pages 507-524, December.
    4. Jegadeesh, Narasimhan & Kim, Woojin, 2006. "Value of analyst recommendations: International evidence," Journal of Financial Markets, Elsevier, vol. 9(3), pages 274-309, August.
    5. Moloney, Niamh, 2008. "EC Securities Regulation," OUP Catalogue, Oxford University Press, edition 2, number 9780199202744, Decembrie.
    6. Malcolm Baker & Jeffrey Wurgler, 2007. "Investor Sentiment in the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 129-152, Spring.
    7. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    8. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
    9. Coffee, John C., 2004. "Gatekeeper Failure and Reform: The Challenge of Fashioning Relevant Reforms," Berkeley Olin Program in Law & Economics, Working Paper Series qt13d8s2qs, Berkeley Olin Program in Law & Economics.
    10. Hayes, RM, 1998. "The impact of trading commission incentives on analysts' stock coverage decisions and earnings forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 36(2), pages 299-320.
    11. Gus De Franco & Hai Lu & Florin P. Vasvari, 2007. "Wealth Transfer Effects of Analysts' Misleading Behavior," Journal of Accounting Research, Wiley Blackwell, vol. 45(1), pages 71-110, March.
    12. Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-686.
    13. Chung, Kee H. & Jo, Hoje, 1996. "The Impact of Security Analysts' Monitoring and Marketing Functions on the Market Value of Firms," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 31(4), pages 493-512, December.
    14. Harrison Hong & Jeffrey D. Kubik, 2003. "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts," Journal of Finance, American Finance Association, vol. 58(1), pages 313-351, February.
    15. Malmendier, Ulrike & Shanthikumar, Devin M., 2009. "Do Security Analysts Speak In Two Tongues?," Department of Economics, Working Paper Series qt15r9k25g, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    16. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mao, Ruiqi & Segara, Reuben & Westerholm, Joakim, 2019. "Analyst tipping: Evidence on Finnish stocks," International Review of Financial Analysis, Elsevier, vol. 66(C).
    2. Prokop, Jörg & Kammann, Benno, 2018. "The effect of the European Markets in Financial Instruments Directive on affiliated analysts’ earnings forecast optimism," Journal of Economics and Business, Elsevier, vol. 95(C), pages 75-86.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    2. Jagjeev Dosanjh, 2017. "Exchange Initiatives and Market Efficiency: Evidence from the Australian Securities Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2017.
    3. repec:uts:finphd:34 is not listed on IDEAS
    4. Devos, Erik & Hao, Wei & Prevost, Andrew K. & Wongchoti, Udomsak, 2015. "Stock return synchronicity and the market response to analyst recommendation revisions," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 376-389.
    5. Anup Agrawal & Mark A. Chen, 2008. "Do Analyst Conflicts Matter? Evidence from Stock Recommendations," Journal of Law and Economics, University of Chicago Press, vol. 51(3), pages 503-537, August.
    6. William Baker & Gregory Dumont, 2014. "Equity Analyst Recommendations: A Case for Affirmative Disclosure?," Journal of Consumer Affairs, Wiley Blackwell, vol. 48(1), pages 96-123, March.
    7. Hsieh, Wen-liang Gideon & Lee, Chin-Shen, 2021. "Who reacts to what information in securities analyst reports? Direct evidence from the investor trade imbalance," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    8. Brown, Lawrence D. & Call, Andrew C. & Clement, Michael B. & Sharp, Nathan Y., 2016. "The activities of buy-side analysts and the determinants of their stock recommendations," Journal of Accounting and Economics, Elsevier, vol. 62(1), pages 139-156.
    9. Marina Balboa & J. Carlos Gómez‐Sala & Germán López‐Espinosa, 2009. "The Value of Adjusting the Bias in Recommendations: International Evidence," European Financial Management, European Financial Management Association, vol. 15(1), pages 208-230, January.
    10. Tsung-Yu Hsieh & Tsai-Yin Lin & Fangjhy Li & Yi-Ting Huang, 2023. "Analyst’s Target Price Revision and Dealer’s Trading Behavior Analysis: Evidence from Taiwanese Stock Market," Sustainability, MDPI, vol. 15(4), pages 1-9, February.
    11. Altınkılıç, Oya & Balashov, Vadim S. & Hansen, Robert S., 2019. "Investment bank monitoring and bonding of security analysts’ research," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 98-119.
    12. Thabang Mokoaleli‐Mokoteli & Richard J. Taffler & Vineet Agarwal, 2009. "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3‐4), pages 384-418, April.
    13. Juyoun Ryoo & Cheolwoo Lee & Jin Q Jeon, 2020. "Sustainability of Analyst Recommendations in Multiple Lead Underwriter IPOs," Sustainability, MDPI, vol. 12(5), pages 1-36, March.
    14. Andrew C. Call & Nathan Y. Sharp & Paul A. Wong, 2019. "Changes in analysts’ stock recommendations following regulatory action against their brokerage," Review of Accounting Studies, Springer, vol. 24(4), pages 1184-1213, December.
    15. Jeremy Burke & Angela A. Hung & Jack Clift & Steven Garber & Joanne K. Yoong, 2015. "Impacts of Conflicts of Interest in the Financial Services Industry," Working Papers WR-1076, RAND Corporation.
    16. AltInkIlIç, Oya & Hansen, Robert S., 2009. "On the information role of stock recommendation revisions," Journal of Accounting and Economics, Elsevier, vol. 48(1), pages 17-36, October.
    17. Azzi, Sarah & Bird, Ron, 2005. "Prophets during boom and gloom downunder," Global Finance Journal, Elsevier, vol. 15(3), pages 337-367, February.
    18. Yu, Fang (Frank), 2008. "Analyst coverage and earnings management," Journal of Financial Economics, Elsevier, vol. 88(2), pages 245-271, May.
    19. Francis, Bill & Hasan, Iftekhar & Liu, Liuling & Wu, Qiang & Zhao, Yijiang, 2021. "Financial analysts' career concerns and the cost of private debt," Journal of Corporate Finance, Elsevier, vol. 67(C).
    20. Dambra, Michael & Field, Laura Casares & Gustafson, Matthew T. & Pisciotta, Kevin, 2018. "The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act," Journal of Accounting and Economics, Elsevier, vol. 65(2), pages 302-330.
    21. Nolte, Ingmar & Nolte, Sandra & Vasios, Michalis, 2014. "Sell-side analysts’ career concerns during banking stresses," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 424-441.

    More about this item

    Keywords

    Security Analysis; Financial Regulation; Conflicts of Interest; Investor Protection; G10; G18; G20; G24; G32; G38;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:iaecre:v:20:y:2014:i:4:p:369-384:10.1007/s11294-014-9484-x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.