August 04, 2004

Study Finds Independent Research Firms’ Buy Recommendations Outperformed Those of Investment Banks

LOS ANGELES — Independent research firms’ buy recommendations outperformed those of investment banks according to a recent study conducted by three business school professors.

The study showed that, over the 1996-mid 2003 time period, buy recommendations issued by securities firms with no investment banking business outperformed the buys issued by analysts at investment banks by an average of about eight percentage points annually.

In contrast, hold and sell recommendations coming from investment banks outperformed (on the downside) those of the independent research firms by four and a half percentage points annually.

“The SEC and other regulators recently mandated that ten of the largest investment banking firms provide independent research to their clients.  Our comparison of investment banking and independent research firm recommendations was motivated by this new requirement, as well as the arguably implicit assumption that independent research firm recommendations are superior,” said Brett Trueman, professor of accounting, UCLA Anderson School of Management, and one of the study’s co-authors. 

Investment bank buy recommendation underperformance was concentrated in the period subsequent to the NASDAQ market peak, when it averaged 17 percent annually.  More strikingly, during this period the subset of investment bank buy recommendations outstanding subsequent to equity offerings underperformed those of independent research firms by almost 22 percent annually. 

“These results suggest that the underperformance of investment bank buy recommendations was at least partly due to a reluctance to downgrade stocks whose prospects dimmed during the early 2000's bear market, as claimed in the SEC’s Global Analyst Research Settlement,” said Brad Barber, professor of finance at the University of California, Davis, and another co-author. 

Additional analyses find that the underperformance of investment bank buy recommendations extended not only to the ten investment banks sanctioned in the research settlement but to the non-sanctioned investment banks as well.

Added Reuven Lehavy, assistant professor of accounting at the University of Michigan Business School, and another co-author, “This uniform underperformance suggests that differentiating between the sanctioned and non-sanctioned banks, in terms of the requirement that independent research be distributed to clients, may not be justified.”

About UCLA Anderson School of Management
UCLA Anderson School of Management is perennially ranked among the top-tier business schools in the world.  Award-winning faculty renowned for their research and teaching, highly selective admissions, successful alumni and world-class facilities combine to provide an extraordinary learning environment.  Established in 1935, UCLA Anderson provides management education to more than 1,400 students enrolled in full-time, part-time and executive MBA programs and doctoral programs.

UCLA Anderson’s faculty includes outstanding educators and researchers who share their scholarship and expertise in such fundamental areas as finance, marketing, accounting, business economics, decision sciences, operations and technology management, human resources and organizational behavior, information systems, strategy and policy.
Recognizing that the school offers unparalleled expertise in management education, the world's business community turns to UCLA Anderson School of Management as a center of influence for the ideas, innovations, strategies and talent that will shape the future.

Read the Study (PDF)

Co-authors of the Study
Brett Trueman
Professor of Accounting
UCLA Anderson School of Management
(310) 825-4720

Brad Barber
Professor of Finance
Graduate School of Management
University of California, Davis
(530) 752-0512

Reuven Lehavy
Assistant Professor of Accounting
University of Michigan Business School
(734) 763-1508

Contact Information

Hilary Rehder, (310) 206-7707, hilary.rehder@anderson.ucla.edu

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