Brokerage Industry Self‐Regulation: The Case of Analysts’ Background Disclosures*

Brown, Lawrence D.; Hugon, Artur; Lü, Hai

doi:10.1111/j.1911-3846.2010.01035.x

“…These background disclosures are self-reported by the analysts, their brokerage firms, or a government agency, and include information about various aspects of the analyst's history, including criminal actions, personal bankruptcies, and loss of employment. Brown et al (2010) find that analysts included in these background disclosures issue less accurate earnings forecasts that tend to elicit a weaker market reaction. Whereas Brown et al (2010) examine associations between disclosures about analysts' backgrounds and properties of sell-side research, we examine changes in analyst behavior following formal regulatory sanctions.…”

Section: Prior Researchmentioning

confidence: 87%

“…Two other studies, Brown, Hugon, and Lu (2010) and Pacelli (2019), rely on data obtained from FINRA (or its predecessor, NASD). Brown et al (2010) examine background disclosures about individual analysts provided by the NASD and examine the association between these disclosures and properties of analysts' earnings forecasts.…”

Section: Prior Researchmentioning

confidence: 99%

“…Two other studies, Brown, Hugon, and Lu (2010) and Pacelli (2019), rely on data obtained from FINRA (or its predecessor, NASD). Brown et al (2010) examine background disclosures about individual analysts provided by the NASD and examine the association between these disclosures and properties of analysts' earnings forecasts. These background disclosures are self-reported by the analysts, their brokerage firms, or a government agency, and include information about various aspects of the analyst's history, including criminal actions, personal bankruptcies, and loss of employment.…”

Section: Prior Researchmentioning

confidence: 99%

“…Whereas Brown et al (2010) examine associations between disclosures about analysts' backgrounds and properties of sell-side research, we examine changes in analyst behavior following formal regulatory sanctions. Further, all the regulatory actions in our sample pertain to violations inside the research department of sell-side brokerages, while the disclosures examined by Brown et al (2010) include information unrelated to sell-side research (e.g., personal bankruptcies).…”

Section: Prior Researchmentioning

confidence: 99%

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Changes in analysts’ stock recommendations following regulatory action against their brokerage

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Despite the importance of sell-side analysts in the capital markets, we know little about the effectiveness of routine monitoring of the sell-side industry. We examine the attributes of sell-side research issued by analysts before and after their brokerage is subject to regulatory sanctions. We find that after a regulatory action, analysts at sanctioned brokerages lower their stock recommendations, both in absolute terms and relative to the recommendations of other analysts following the same firms. Following a regulatory action, analysts at sanctioned brokerages are also more likely than analysts at other brokerages to downgrade a company's stock after the receipt of unfavorable information about the firm. Importantly, we document that analysts at non-sanctioned brokerages also reduce the optimism in their stock recommendations when a peer analyst's brokerage is sanctioned, consistent with regulatory spillovers as a result of routine regulatory monitoring. Our study provides empirical evidence that regulatory action against sell-side brokerages is associated with a reduction in sell-side analysts' positive bias at both sanctioned and non-sanctioned brokerages.

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“…Finally, Ljungqvist et al (2007) analysts' backgrounds and properties of sell-side research, we examine changes in analyst 11 behavior following formal regulatory sanctions. Further, all the regulatory actions in our sample pertain to violations inside the research department of sell-side brokerages, while the disclosures examined by Brown et al (2010) include information unrelated to sell-side research (e.g., personal bankruptcies).…”

Section: Prior Researchmentioning

confidence: 99%

Changes in Analysts’ Stock Recommendations Following Regulatory Action Against Their Brokerage

Call

¹

,

Sharp

²

,

Wong

³

2019

View full text Add to dashboard Cite

Despite the importance of sell-side analysts in the capital markets, we know little about the effectiveness of routine monitoring of the sell-side industry. We examine the attributes of sell-side research issued by analysts before and after their brokerage is subject to regulatory sanctions. We find that after a regulatory action, analysts at sanctioned brokerages lower their stock recommendations, both in absolute terms and relative to the recommendations of other analysts following the same firms. Following a regulatory action, analysts at sanctioned brokerages are also more likely than analysts at other brokerages to downgrade a company's stock after the receipt of unfavorable information about the firm. Importantly, we document that analysts at non-sanctioned brokerages also reduce the optimism in their stock recommendations when a peer analyst's brokerage is sanctioned, consistent with regulatory spillovers as a result of routine regulatory monitoring. Our study provides empirical evidence that regulatory action against sell-side brokerages is associated with a reduction in sell-side analysts' positive bias at both sanctioned and non-sanctioned brokerages.

show abstract

Financial Gatekeepers and Investor Protection: Evidence from Criminal Background Checks

Law

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J of Accounting Research

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We examine whether financial advisors with pre-advisor criminal records pose a greater risk to investors than those without. We find that financial advisors with pre-advisor criminal records are more likely to receive future customer complaints. Their complaints are more likely to receive arbitration awards or settlements and are more likely to involve large settlements exceeding $100,000. Finally, clients are more likely to suffer service disruptions from engaging advisors with pre-advisor criminal records, even incremental to the brokerage firm being high-risk. Although we do not have performance data * Nanyang Technological University; † University of Texas at Austin. Accepted by Haresh Sapra. We appreciate helpful comments of two anonymous referees,

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Brokerage Industry Self‐Regulation: The Case of Analysts’ Background Disclosures*

Cited by 10 publications

References 48 publications

Changes in analysts’ stock recommendations following regulatory action against their brokerage

Changes in analysts’ stock recommendations following regulatory action against their brokerage

Changes in Analysts’ Stock Recommendations Following Regulatory Action Against Their Brokerage

Financial Gatekeepers and Investor Protection: Evidence from Criminal Background Checks

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