For much of the second half of the 20th century, critics of Wall Street charged that brokerage research was tainted by the tight relationship between analysts and investment bankers. These well documented “agency” issues remained until April 2003 when leading financial institutions signed a deal with the SEC to reimburse investors and put an end to the cozy relationship between the research departments and i-banking departments of major US financial institutions. Many thought this put an end to the conflicts of interest that had plagued the industry. But, apparently, they may have been wrong.
A recent study by Sung-Gon Chung and Melvyn Teo of Singapore Management University provides evidence that analysts have run from the arms of the i-bankers and into the arms of the hedge fund managers. Write Chung and Teo:
[S]ell-side analysts tend to issue buy and strong buy recommendations on stocks predominantly held by hedge funds… in a post-Spitzer era, Wall Street research departments having been forcibly weaned off investment banking revenues now contend with new hedge fund-induced conflicts of interests.If you enjoy the content at iBankCoin, please follow us on Twitter
