Does Policy Analysis Matter? The Value of Washington Analysts to Investment and Capital Markets

• In Event: Analysts as a product of the capital markets

Abstract

Washington policy analysts analyze regulatory and legislative developments, and provide policy-related research to in-house sell-side analyst workforce and institutional clients. Sell-side analysts with access to policy research issue superior stock recommendations—but only in politically-sensitive (PS) industries. Such analysts’ research reports are more infused with political content, more likely to be revised following the passage of industry-relevant Congressional bills and after earnings conference
calls when management discusses political risk factors. Brokerage houses offering policy research derive higher equity trading commissions from institutional clients within politically-sensitive industries. Policy research promulgates into stock prices through stock recommendations and policy reports. Finally, policy-induced uncertainties are attenuated for stocks receiving more intense policy research indicating that Washington policy analysts have real economic effects on firms’ information environments.

Authors

• Roni Michaely, Cornell University

• Daniel Bradley, University of South Florida

• Sinan Gokkaya, Ohio University

• Xi Liu, Miami University