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  • Review of Accounting Studies

Brokerage Incentives and Analyst Forecast Optimism: Evidence from the Protocol for Broker Recruiting

By: Braiden Coleman, Michael Drake, Joseph Pacelli and Brady Twedt
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Abstract

In this study, we offer novel evidence on how the nature of brokerage-client relationships can influence the quality of equity research. We exploit a unique setting provided by the Protocol for Broker Recruiting to examine whether relaxed broker non-compete agreement (NCA) enforcement generates spillover effects on sell-side analysts. Entry into this agreement reassigns ownership of the client relationship from the brokerage house to individual brokers, potentially generating a greater standard of care. Using a generalized difference-in-difference research design, we provide evidence consistent with brokers reducing pressure on analysts to produce optimistic research following protocol entry. This effect is concentrated among less experienced and non-All Star analysts, who previously may have faced the greatest pressures to sacrifice objectivity. Additionally, we find that analysts issue more accurate forecasts and generate reports with heightened market reactions following protocol entry. Our collective evidence sheds new light on how the nature of brokerage relationships can influence analysts’ research production.

Keywords

Brokers; Analysts; Forecasts; Bias; Protocol; Investment; Research; Forecasting and Prediction

Citation

Coleman, Braiden, Michael Drake, Joseph Pacelli, and Brady Twedt. "Brokerage Incentives and Analyst Forecast Optimism: Evidence from the Protocol for Broker Recruiting." Review of Accounting Studies (forthcoming).
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About The Author

Joseph Pacelli

Accounting and Management
→More Publications

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More from the Authors
  • Do Job Seekers Value Diversity Information? Evidence from a Field Experiment By: Joseph Pacelli, Jung Ho Choi, Kristina M. Rennekamp and Sorabh Tomar
  • Dirty Money: How Banks Influence Financial Crime By: Joseph Pacelli, Janet Gao, Jan Schneemeier and Yufeng Wu
  • Does the Freedom of Information Act Foil the Securities and Exchange Commission's Intent to Keep Investigations Confidential? By: Braiden Coleman, Kenneth Merkley, Brian Miller and Joseph Pacelli
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