Conflict-of-Interest Reforms and Analysts' Research Biases

This study examines the consequences of a series of reforms targeting investment-banking-related conflicts of interest. We compare and contrast optimism biases in analysts’ stock recommendations and earnings forecasts across different types of analyst firms in the post-reform period 2004-2007 with those in the pre-reform period 1998-2001. We document empirical results consistent with a significant reduction in the relative optimism of investment bank stock recommendations, but not earnings forecasts. Moreover, we find little change in the profitability of stock recommendations, but a sharp drop in the accuracy of earnings forecasts. In sum, the reforms achieve the objective of mitigating the apparent optimism in investment bank stock recommendations, but they do not result in more profitable recommendations or more precise earnings forecasts.