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Banking relationships and sell-side research

  • Ozgur E. Ergungor
  • Leonardo Madureira
  • Nandkumar Nayar
  • Ajai K. Singh

This paper examines disclosures by sell-side analysts when their institution has a lending relationship with the firms being covered. Lending-affiliated analysts’ earnings forecasts are found to be more accurate relative to forecasts by other analysts but this differential accuracy manifests itself only after the advent of the loan. Despite this increased earnings forecast accuracy, lending-affiliated analysts exhibit undue optimism in their brokerage recommendations and forecasts of long term growth. The optimism exists both before and after the lending commences. The evidence suggests that any insights into the covered firm via thelending relationship are employed by bank analysts in a selective manner. They appear unwilling to compromise on disclosures where expost accuracy is clearly revealed, possibly to preserve their own personal reputation. However, they are overly optimistic on other disclosures where resolution is less readily verifiable, possibly to promote their lending client’s financial standing.

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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1114.

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Date of creation: 2011
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Handle: RePEc:fip:fedcwp:1114
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