Trade Generation, Reputation, and Sell‐Side Analysts

  • Author(s): ANDREW R. JACKSON
  • Published: Mar 02, 2005
  • Pages: 673-717
  • DOI: 10.1111/j.1540-6261.2005.00743.x

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.

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