Do the Stock Recommendations of Foreign Security Houses have Conflicts of Interest
Date Issued
2009
Date
2009
Author(s)
Tsai, Chih-Sheng
Abstract
We discuss whether the announcement of the research reports of the foreign security houses and the proprietary trading would lead to conflicts of interest between the security houses and its clients regarding pursuing inappropriate interests. For this purpose, we use the research reports and the actual transaction data of proprietary trading divisions from three foreign security houses, Merrill Lynch, Credit Suisse First Boston, and JPMorgan Chase & Co., from December 2003 to October 2004.or this purpose, we analyze the types of conflicts of interest and its levels of foreign security houses by creating the conflicts of interest index (CII). We also evaluate how the level of conflicts of interest explains the accumulated abnormal returns by conducting hypothesis tests.he results indicate that under the investment recommendations of upgrading or buying, the level of conflicts of interest for Merrill Lynch is higher than other two security houses. It also shows that Merrill Lynch highly departs from its investment rating. Under the holding investment recommendations, all three security houses show the behavior of buying or selling through its proprietary after announcing investment recommendations. Under the recommendations of downgrading or selling, Credit Suisse First Boston shows a higher level of conflicts of interest. In the evaluation of whether there exist abnormal returns regarding conflicts of interest, the results indicate that only under the investment recommendation of upgrading or buying, the CII1, calculated by the data of one week before and after the transaction of the proprietary trading, explains the accumulated unusual returns better when the level of conflicts of interest is high. Hence, foreign security houses indeed gain profits from conflicts of interest on the announcement date of investment recommendations but not after that date.
Subjects
foreign security houses
conflicts of interest
stock investment recommendations
Type
thesis
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