Fascinating article. I quote the abstract
To what extent conflicts of interest affect the investment value of sell-side analyst research is an ongoing debate. We approach this issue from a new direction by investigating how asset-management divisions of investment banks use stock recommendations issued by their own analysts. Based on holdings changes around initiations, upgrades, and downgrades from 1993 to 2003, we find that these bank-affiliated investors follow recommendations from sell-side analysts in general, increasing (decreasing) their relative holdings following positive (negative) recommendations. More importantly, these investors respond more strongly to recommendations issued by their own analysts than to those issued by analysts affiliated with other banks, especially for recommendations on small and low-analyst-coverage firms. Thus, we find that investment banks “eat their own cooking,” showing that these presumably sophisticated institutional investors view sell-side recommendations as having investment value, particularly when the recommendations come from their own analysts.
Once upon a time, I was quite taken by investment banking research reports. Used to invest based upon what a bank would say. But now that I am a bit more wiser after making some real duds, I observe these research analysis with a far more jaundiced eye, and rely on my investments with my own research and views. Only myself to blame when I invest in duds but at least I’m not being stupid to follow research which can and is frequently biased for a variety of reasons.
But this article is interesting from a different perspective. Looks like the asset management arms of these banks tend to rely more on their colleagues across the Chinese walls. Hmmm, so before you select a fund, make sure that you check whether the owner has an investment bank and what kind of analysts do they have..