Capital Markets

Spitzer Pact Cut Analyst Bias: Study

Although sell-side analysts still favor issuers who do business with their firms, the global settlement has curbed their enthusiasm.
Stephen TaubNovember 10, 2004

Has New York State Attorney General Eliot put the fear of prosecution into Wall Street’s securities analysts?

Apparently yes, a trio of professors from Washington University in St. Louis say.

To be sure, sell-side analysts still show a favorable bias toward issuers that are clients of their firms, according to a recent study, “Are Analysts Still Biased? Evidence from the Post ‘Global Settlement’ Period.” But the preferential treatment is weakening.

The professors chalked up the lingering bias to the idea that issuers hire dealmakers from firms whose analysts they believe will be bullish, according to an assessment of the report by Investment Dealers’ Digest.

“Companies tend to choose analysts who like them. That’s the way it works,” study author Ohad Kadan told IDD. Kadan is an assistant professor of finance in Washington University’s Olin School of Business. “Whether an analyst does investment banking business or he doesn’t, the difference between the two is much different than it used to be. There used to be a large difference between the two.”

The study reportedly found that before Spitzer won the settlement with Wall Street research firms, affiliated analysts’ recommendations were 21 percent more optimistic than unaffiliated recommendations. After Spitzer’s court victory, however, affiliated analysts were only 13 percent more optimistic toward client issuers.

To gauge the effects of Regulation FD, the study’s authors looked at analysts’ reports dating from 1995 to September 2000, the period before Reg FD took effect. Reg FD curbed corporate release of important information to chosen analysts before the company’s financials are released.

The professors also studied reports September 2000 up to the announcement of the global settlement in December 2002. They also considered reports dating from April 2003 to May 2004, the period following the global settlement’s official enactment.

The authors compared “the recommendations of affiliated and unaffiliated analysts within each period,” said Tzachi Zach, assistant professor of accounting and a colleague of Kadan.

Asked whether the settlement was effective, Zach told the publication: “It appears to have changed the behavior of analysts.”