LOS ANGELES, Aug. 4 /PRNewswire/ -- Independent research firms' buy
recommendations outperformed those of investment banks according to a recent
study conducted by three business school professors.
The study showed that, over the 1996-mid 2003 time period, buy
recommendations issued by securities firms with no investment banking business
outperformed the buys issued by analysts at investment banks by an average of
about 8 percentage points annually.
In contrast, hold and sell recommendations coming from investment banks
outperformed (on the downside) those of the independent research firms by
4 1/2 percentage points annually.
"The SEC and other regulators recently mandated that ten of the largest
investment banking firms provide independent research to their clients. Our
comparison of investment banking and independent research firm recommendations
was motivated by this new requirement, as well as the arguably implicit
assumption that independent research firm recommendations are superior," said
Brett Trueman, professor of accounting, UCLA Anderson School of Management,
and one of the study's co-authors.
Investment bank buy recommendation underperformance was concentrated in
the period subsequent to the NASDAQ market peak, when it averaged 17 percent
annually. More strikingly, during this period the subset of investment bank
buy recommendations outstanding subsequent to equity offerings underperformed
those of independent research firms by almost 22 percent annually.
"These results suggest that the underperformance of investment bank buy
recommendations was at least partly due to a reluctance to downgrade stocks
whose prospects dimmed during the early 2000's bear market, as claimed in the
SEC's Global Analyst Research Settlement," said Brad Barber, professor of
finance at the University of California, Davis, and another co-author.
Additional analyses find that the underperformance of investment bank buy
recommendations extended not only to the ten investment banks sanctioned in
the research settlement but to the non-sanctioned investment banks as well.
Added Reuven Lehavy, assistant professor of accounting at the University
of Michigan, and another co-author, "This uniform underperformance suggests
that differentiating between the sanctioned and non-sanctioned banks, in terms
of the requirement that independent research be distributed to clients, may
not be justified."
About UCLA Anderson School of Management
UCLA Anderson School of Management is perennially ranked among the
top-tier business schools in the world. Award-winning faculty renowned for
their research and teaching, highly selective admissions, successful alumni
and world-class facilities combine to provide an extraordinary learning
environment. Established in 1935, UCLA Anderson provides management education
to more than 1,400 students enrolled in full-time, part-time and executive MBA
programs and doctoral programs.
UCLA Anderson's faculty includes outstanding educators and researchers who
share their scholarship and expertise in such fundamental areas as finance,
marketing, accounting, business economics, decision sciences, operations and
technology management, human resources and organizational behavior,
information systems, strategy and policy.
Recognizing that the school offers unparalleled expertise in management
education, the world's business community turns to UCLA Anderson School of
Management as a center of influence for the ideas, innovations, strategies and
talent that will shape the future.
To contact the authors of this study:
UCLA Anderson School of Management
Graduate School of Management
University of California, Davis
School of Business
University of Michigan
Link to study:
SOURCE UCLA Anderson School of Management