۱- Introduction

۲- Contribution and arguments for and against analyst ownership

۳- What can we infer from analyst ownership disclosure and the evidence presented?

۴- Some questions for potential future research

۵- Conclusion

References

Abstract

Chan et al. (2018) provide the first large scale study of sell-side analysts owning firms for which they also provide research coverage. Consistent with signaling credibility, they find analysts with ownership positions allocate more effort to these firms and the informativeness of their recommendations are enhanced. However, consistent with analyst conflicts, they find analysts that own the stock issue more optimistic target prices and frequently trade against their outstanding recommendations (which is prohibited). In this discussion, I review the evidence and point out the study’s limitations. Despite its shortcomings, this paper should renew attention on analyst ownership particularly because it has potentially important policy implications. I pose several questions that may be potentially interesting to guide future research.

Introduction

Should analysts be allowed to own stock in the firms they provide research coverage for? If so, what disclosure(s), if any, should be required of analysts to convey to market participants their ownership stake? The answers to these questions can have very important policy implications, but this topic has been largely ignored by researchers. Chan, Lin, Yu and Zhao (2018) (CLYZ) provide the first large scale empirical study that attempts to address some of these key issues.1 After the „bubble‟ burst in 2000, regulators targeted sell-side analysts for potentially misleading investors for issuing overly optimistic research. The major issue at hand focused on conflicts of interest that exist from the perspective of the analyst‟s employer—that analysts issue rosy recommendations to please their investment banking clients to generate deal flow at the expense of investors that follow their recommendations. These inquiries ultimately led to the Global Research Settlement in 2003, which included the largest monetary fine on Wall Street along with other structural reforms that were primarily directed at mitigating analyst conflicts stemming from corporate finance activity. Not surprisingly, this topic has generated tremendous attention in the popular press and academic literature. What is surprising is that the issue of analyst ownership has not attracted similar attention.2 Schack (2001) sums this issue up nicely: “Wall Street research analysts increasingly are accused of ditching their objectivity to please underwriting clients….But largely overlooked in all of the complaints has been perhaps the most fundamental conflict of interest of all for Wall Street analysts, owning the stocks of companies they cover.”