Title: Brokerage firms' revenue and profitability of their recommendations: before and after 1999-2002

Authors: Vivek Sharma

Addresses: Department of Accounting and Finance, University of Michigan-Dearborn, Dearborn, MI 48126, USA

Abstract: We examine how the research departments of brokerage firms may issue biased recommendations in order to boost the revenue of the investment banking departments of the brokerage firms during 1993-2006. We find that during 1993-2006, sanctioned brokerage firms| upgrades not only underperformed the upgrades of non-sanctioned brokerage firms, but they also earned negative abnormal returns. The degree of underperformance for sanctioned brokerage firms| upgrades was at the highest during 1999-2002. More surprisingly, the underperformance of upgrades continues in 2003-2006. We also find weak evidence of underperformance of upgrades in the period of 1993-1998.

Keywords: analyst recommendations; brokerage firms; brokerage revenue; conflict of interest; global settlement; revenue management; bias; investment banking; under-performance; upgrades.

DOI: 10.1504/IJRM.2009.027387

International Journal of Revenue Management, 2009 Vol.3 No.3, pp.270 - 283

Published online: 21 Jul 2009 *

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