Murali Jagannathana and Srinivasan Krishnamurthy
Volume 3, Number 3, Third Quarter 2005
Equity research analysts of investment banks have been subjected to significant regulatory scrutiny and enforcement action in recent years. Specifically, two major issues have attracted legal attention: (1) whether analysts favorably bias their forecasts to secure investment-banking business, and (2) whether selective disclosure to analysts worsens the firm’s information environment. In this paper, we address the justification for the regulatory actions concerning these two issues. We use a hand-collected sample of firms with investment banker directors, and hypothesize that the conflicts of interests are likely to be most severe in these firms. Our evidence provides little support for the concerns of the regulators. We do not find that affiliated analysts forecasts are more biased or less accurate than forecasts of other analysts. We do find that firms with investment banker directors have a superior information environment. If analysts affiliated with the investment banker director are more likely to receive selective information, this evidence is not supportive of the contention that firms use selective disclosure to gain favors from these analysts.