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
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.