Analyst recommendations, brokerage firm revenue and product market power Online publication date: Thu, 06-May-2010
by Vivek Sharma
International Journal of Revenue Management (IJRM), Vol. 4, No. 2, 2010
Abstract: We link brokerage firm revenue and affiliated analysts' recommendations to the firms' competitive positions in product markets. Our first important finding is that affiliated analysts tend to assign more favourable ratings to the firms with high market power (more competitive firms) during 1993-2006. Our results are robust to controlling for other firm characteristics identified in prior literature associated with more favourable recommendations. Our second important finding is that a portfolio of stocks with above median market power (more competitive firms) underperforms a portfolio of below median market power stocks (less competitive firms) adjusting for market, size, book-to-market and momentum factors. Our results are consistent with the idea that at least part of the favourable recommendations for high market power firms are related to affiliated brokerage firms' revenue from the same firms. Therefore, investors should be cautious following the advice of the analysts related to firms enjoying high market power.
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