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Regulatory effects on Analysts' conflicts of interest in corporate financing activities: Evidence from NASD Rule 2711

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  • Chen, Peter F.
  • Novoselov, Kirill E.
  • Wang, Yihong

Abstract

We investigate the effects of NASD Rule 2711 on analysts' conflict of interest in corporate financing activities. Specifically, we examine the relations (1) between analysts' guidance in earnings forecasts and recommendations and corporate external financing and (2) between external financing and future stock returns during the 1994–2010 period. We find a positive relation of analysts' guidance in earnings forecasts and recommendations (especially long-term growth forecast and recommendations) and corporate financing activities, but the relation is weaker in the post-Rule period than in the pre-Rule period. We also find a negative relation between corporate external financing and future stock returns, but the relation is weaker in the post-Rule period. Moreover, the changes of these relations after the implementation of the Rule are greater for firms with greater conflicts of interest. Our empirical results suggest that Rule 2711 has reduced the extent of analysts' conflicts of interest in corporate financing activities.

Suggested Citation

  • Chen, Peter F. & Novoselov, Kirill E. & Wang, Yihong, 2018. "Regulatory effects on Analysts' conflicts of interest in corporate financing activities: Evidence from NASD Rule 2711," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 658-679.
    • Handle: RePEc:eee:corfin:v:48:y:2018:i:c:p:658-679
    DOI: 10.1016/j.jcorpfin.2017.12.020
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