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Trade Generation, Reputation, and Sell-Side Analysts

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  • ANDREW R. JACKSON

Abstract

This paper examines the trade-generation and reputation-building incentives facing sell-side analysts. Using a unique data set I demonstrate that optimistic analysts generate more trade for their brokerage firms, as do high reputation analysts. I also find that accurate analysts generate higher reputations. The analyst therefore faces a conflict between telling the truth to build her reputation versus misleading investors via optimistic forecasts to generate short-term increases in trading commissions. In equilibrium I show forecast optimism can exist, even when investment-banking affiliations are removed. The conclusions may have important policy implications given recent changes in the institutional structure of the brokerage industry. Copyright 2005 by The American Finance Association.

Suggested Citation

  • Andrew R. Jackson, 2005. "Trade Generation, Reputation, and Sell-Side Analysts," Journal of Finance, American Finance Association, vol. 60(2), pages 673-717, April.
  • Handle: RePEc:bla:jfinan:v:60:y:2005:i:2:p:673-717
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