Newspaper article THE JOURNAL RECORD

Do Securities Analysts Give Their Employers Better Ratings?

Newspaper article THE JOURNAL RECORD

Do Securities Analysts Give Their Employers Better Ratings?

Article excerpt

A new study has lent credence to an old suspicion.

There have long been stories on Wall Street about pressures on analysts to give good ratings to the securities of companies with which their employers do business.

The new research, presented last week in Cincinnati at the annual meeting of the Academy of Management, suggests that, in the aggregate, the pressures are real.

The study shows that investment banks generally give higher ratings to offerings and deals when the involved companies are the banks' clients than when they are not.

The study, conducted by Warren Boeker and Matthew Hayward of Columbia University Business School, used a scale of 1 to 5 to examine ratings of 102 equity, 139 debt and 45 merger-and-acquisition deals, with a 1 signifying the strongest sell recommendation and a 5 the strongest buy.

In 8,169 ratings on the transactions, the mean rating was 3.96 when investment banks assessed the deals of companies for which they did corporate finance work, compared with 3.66 for nonclient deals.

The researchers looked at 44 firms -- mostly conventional investment banks like Morgan Stanley and Goldman, Sachs, but also others, like Prudential Securities and Smith Barney, that have large retail brokerage businesses.

The authors focused on 70 companies in several industries, from biotechnology to restaurants, and the deals they engaged in from 1989 to 1993.

The disparity in ratings for clients and nonclients was particularly great in some areas. In mergers and acquisitions, for example, banks gave their own customers a mean rating of 4.11, compared with 3.65 by banks uninvolved with the deals.

The effect of these differences is not just theoretical, the authors contend. "Purportedly objective ratings that are strongly influenced by intra-organizational power have major potential to mislead investors," Hayward said.

In seeking to explain their findings, the authors note that corporate finance fees typically account for 20 percent of most investment banks' revenues, while commissions for retail equity sales rarely amount to more than 5 percent.

The authors also say that banks' codes of ethics and "Chinese walls," which are processes firms follow in an effort to keep one part of their business from unduly influencing another part, apparently do not work. …

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