Article | Journal of Accounting Research | March 2013

The Client Is King: Do Mutual Fund Relationships Bias Analyst Recommendations?

by Michael Firth, Chen Lin, Ping Liu and Yuhai Xuan


This paper investigates whether the business relations between mutual funds and brokerage firms influence sell-side analyst recommendations. Using a unique data set that discloses brokerage firms' commission income derived from each mutual fund client as well as the share holdings of these mutual funds, we find that an analyst's recommendation on a stock relative to consensus is significantly higher if the stock is held by the mutual fund clients of the analyst's brokerage firm. The optimism in analyst recommendations increases with the weight of the stock in a mutual fund client's portfolio and the commission revenue generated from the mutual fund client. However, this favorable recommendation bias towards a client's existing portfolio stocks is mitigated if the stock in question is highly visible to other mutual fund investors. Abnormal stock returns are significantly greater both for the announcement period and in the long run for favorable stock recommendations from analysts not subject to client pressure than for equally favorable recommendations from business-related analysts. In addition, we find that subsequent to announcements of bad news from the covered firms, analysts are significantly less likely to downgrade a stock held by client mutual funds. Mutual funds increase their holdings in a stock that receives a favorable recommendation, but this impact is significantly reduced if the recommendation comes from analysts subject to client pressure.

Keywords: Prejudice and Bias; Decision Choices and Conditions; Investment Funds;


Firth, Michael, Chen Lin, Ping Liu, and Yuhai Xuan. "The Client Is King: Do Mutual Fund Relationships Bias Analyst Recommendations?" Journal of Accounting Research 51, no. 1 (March 2013): 165–200.