The Revolving-Door of Sell-Side Analysts: A Threat to Analysts’ Independence?

• In Event: Analyst Incentive

Abstract

The “revolving-door” phenomenon whereby analysts are hired by firms that they cover poses a threat to their independence. In this paper, I document this phenomenon and assess the extent to which it impairs their independence as manifested by issuance of biased research reports during the year prior to their employment with the covered firms. I find that during this final year, revolving-door analysts alter their forecasts, target prices and recommendations in a direction which suggests that they are attempting to gain favor with their would-be employers. Specifically, relative to other analysts, they issue more optimistic reports about the firms that end up hiring them while, at the same time, they issue more pessimistic reports about other firms’ prospects. While I could not completely rule out alternative interpretations of these results, additional tests make the independence impairment the most plausible interpretation. The findings raise concerns about their independence and indicate a potential benefit to tightening employment regulations in this industry.

Author

• Ben Lourie, ucla