The client is king : do mutual fund relationships bias analyst recommendations?
Document Type
Journal article
Source Publication
Journal of Accounting Research
Publication Date
3-1-2013
Volume
51
Issue
1
First Page
165
Last Page
200
Publisher
Wiley-Blackwell Publishing, Inc.
Abstract
This paper investigates whether the business relations between mutual funds and brokerage firms influence sell-side analyst recommendations. Using a unique data set that discloses brokerage firms’ commission income derived from each mutual fund client as well as the share holdings of these mutual funds, we find that an analyst's recommendation on a stock relative to consensus is significantly higher if the stock is held by the mutual fund clients of the analyst's brokerage firm. The optimism in analyst recommendations increases with the weight of the stock in a mutual fund client's portfolio and the commission revenue generated from the mutual fund client. However, this favorable recommendation bias toward a client's existing portfolio stocks is mitigated if the stock in question is highly visible to other mutual fund investors. Abnormal stock returns are significantly greater both for the announcement period and, in the long run, for favorable stock recommendations from analysts not subject to client pressure than for equally favorable recommendations from business-related analysts. In addition, we find that, subsequent to announcements of bad news from the covered firms, analysts are significantly less likely to downgrade a stock held by client mutual funds. Mutual funds increase their holdings in a stock that receives a favorable recommendation but this impact is significantly reduced if the recommendation comes from analysts subject to client pressure.
DOI
10.1111/j.1475-679X.2012.00469.x
Print ISSN
00218456
E-ISSN
1475679X
Publisher Statement
Access to external full text or publisher's version may require subscription.
Full-text Version
Publisher’s Version
Language
English
Recommended Citation
Firth, M., Lin, C., Liu, P., & Xuan, Y. (2013). The client is king: Do mutual fund relationships bias analyst recommendations? Journal of Accounting Research, 51(1), 165-200. doi: 10.1111/j.1475-679X.2012.00469.x