Study Finds Independent Research Firms' Buy Recommendations Outperformed Those of Investment Banks

Aug 04, 2004, 01:00 ET from UCLA Anderson School of Management

    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
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 to more than 1,400 students enrolled in full-time, part-time and executive MBA
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     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:
      Brett Trueman
      UCLA Anderson School of Management
      (310) 825-4720
      Brad Barber
      Graduate School of Management
      University of California, Davis
      (530) 752-0512
      Reuven Lehavy
      School of Business
      University of Michigan
      (734) 763-1508
     Link to study:

SOURCE UCLA Anderson School of Management