TY - JOUR
T1 - Was the Global Settlement Effective in Mitigating Systematic Bias in Affiliated Analyst Recommendations?
AU - Wu, Minzhi
AU - Wilson, Mark
AU - Wu, Yi
N1 - Publisher Copyright:
© 2015, Springer Science+Business Media Dordrecht.
PY - 2017/12/1
Y1 - 2017/12/1
N2 - Regulators have recently relaxed some provisions of the Global Research Analyst Settlement of 2003 (the “Global Settlement”) and associated reforms, which arose from charges that conflicts of interest within investment banks had induced the issuance of fraudulent or otherwise misleading analyst research reports. We examine the effectiveness of the Global Settlement in reducing the systematic optimism observed in stock recommendations of analysts whose employer is a merger and acquisition (“M&A”) advisor for the covered firm (“affiliated analysts”), by comparing the optimism exhibited in stock recommendations issued by these analysts and by unaffiliated analysts before and after the Global Settlement. To control for the impact on analyst optimism of other time varying factors, our sample includes cases from the US and from other countries in which the Global Settlement had no direct impact. We argue that if the Global Settlement was effective, there should be a reduction in the relative optimism of affiliated analysts following this reform, and that reduction in the relative optimism should be greater for affiliated US analysts, than for affiliated analysts from non-US countries. When optimism is measured over a 180-day period surrounding the M&A announcement, we find a significantly greater reduction in US affiliated analysts’ optimism than occurs outside the US. However, evidence regarding analysts’ optimism in the 90-day period prior to the announcement of an M&A deal is mixed.
AB - Regulators have recently relaxed some provisions of the Global Research Analyst Settlement of 2003 (the “Global Settlement”) and associated reforms, which arose from charges that conflicts of interest within investment banks had induced the issuance of fraudulent or otherwise misleading analyst research reports. We examine the effectiveness of the Global Settlement in reducing the systematic optimism observed in stock recommendations of analysts whose employer is a merger and acquisition (“M&A”) advisor for the covered firm (“affiliated analysts”), by comparing the optimism exhibited in stock recommendations issued by these analysts and by unaffiliated analysts before and after the Global Settlement. To control for the impact on analyst optimism of other time varying factors, our sample includes cases from the US and from other countries in which the Global Settlement had no direct impact. We argue that if the Global Settlement was effective, there should be a reduction in the relative optimism of affiliated analysts following this reform, and that reduction in the relative optimism should be greater for affiliated US analysts, than for affiliated analysts from non-US countries. When optimism is measured over a 180-day period surrounding the M&A announcement, we find a significantly greater reduction in US affiliated analysts’ optimism than occurs outside the US. However, evidence regarding analysts’ optimism in the 90-day period prior to the announcement of an M&A deal is mixed.
KW - Analysts’ optimism
KW - Global settlement
KW - Investment banking incentives
KW - Mergers and acquisitions (M&As)
KW - Selection bias
UR - http://www.scopus.com/inward/record.url?scp=85049190427&partnerID=8YFLogxK
U2 - 10.1007/s10551-015-2888-6
DO - 10.1007/s10551-015-2888-6
M3 - Article
SN - 0167-4544
VL - 146
SP - 485
EP - 503
JO - Journal of Business Ethics
JF - Journal of Business Ethics
IS - 3
ER -