Should financial gatekeepers be publicly traded?

Haozhi Huang, Mingsheng Li, Jing Shi

Research output: Contribution to journalArticleResearchpeer-review

Abstract

We investigate how a broker firm’s initial public offering (IPO) affects its analysts’ fiduciary duty of providing independent and objective recommendations. We find that the analysts of newly listed broker firms issue more positively biased recommendations in the first 2 to 3 years after their employers’ IPO than before the IPO. The increase in the recommendation bias is greater among analysts of affiliated brokers and brokers that raise additional capital after their IPO than among other analysts. Newly listed broker firms experience significant increases in revenue and trading commission, and the increases are positively related to recommendation bias, after controlling for many other factors. More importantly, recommendation bias decreases as newly listed broker firms season and as the importance of trading commission declines. This suggests that public exposure through a broker firm’s IPO does not enhance the integrity and professional conduct of its financial analysts. Rather, economic incentives make financial analysts more accepting of unethical behavior. The overall results imply that the public trading of financial gatekeepers compromises the ethical relationship between financial service professionals and society in general.
LanguageEnglish
Number of pages26
JournalJournal of business ethics
Early online date31 Oct 2018
DOIs
Publication statusE-pub ahead of print - 31 Oct 2018

Fingerprint

Broker
Gatekeeper
Initial public offerings
Analysts
Financial analysts
Compromise
Employers
Fiduciary duty
Revenue
Unethical behavior
Integrity
Economic incentives
Financial services
Factors

Keywords

  • Analyst recommendation
  • Broker firms
  • Ethical conduct
  • Financial gatekeepers
  • Initial public offering

Cite this

@article{766deca4787240f7b075138195fed45a,
title = "Should financial gatekeepers be publicly traded?",
abstract = "We investigate how a broker firm’s initial public offering (IPO) affects its analysts’ fiduciary duty of providing independent and objective recommendations. We find that the analysts of newly listed broker firms issue more positively biased recommendations in the first 2 to 3 years after their employers’ IPO than before the IPO. The increase in the recommendation bias is greater among analysts of affiliated brokers and brokers that raise additional capital after their IPO than among other analysts. Newly listed broker firms experience significant increases in revenue and trading commission, and the increases are positively related to recommendation bias, after controlling for many other factors. More importantly, recommendation bias decreases as newly listed broker firms season and as the importance of trading commission declines. This suggests that public exposure through a broker firm’s IPO does not enhance the integrity and professional conduct of its financial analysts. Rather, economic incentives make financial analysts more accepting of unethical behavior. The overall results imply that the public trading of financial gatekeepers compromises the ethical relationship between financial service professionals and society in general.",
keywords = "Analyst recommendation, Broker firms, Ethical conduct, Financial gatekeepers, Initial public offering",
author = "Haozhi Huang and Mingsheng Li and Jing Shi",
year = "2018",
month = "10",
day = "31",
doi = "10.1007/s10551-018-4044-6",
language = "English",
journal = "Journal of business ethics",
issn = "1573-0697",
publisher = "Springer, Springer Nature",

}

Should financial gatekeepers be publicly traded? / Huang, Haozhi; Li, Mingsheng; Shi, Jing.

In: Journal of business ethics, 31.10.2018.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - Should financial gatekeepers be publicly traded?

AU - Huang,Haozhi

AU - Li,Mingsheng

AU - Shi,Jing

PY - 2018/10/31

Y1 - 2018/10/31

N2 - We investigate how a broker firm’s initial public offering (IPO) affects its analysts’ fiduciary duty of providing independent and objective recommendations. We find that the analysts of newly listed broker firms issue more positively biased recommendations in the first 2 to 3 years after their employers’ IPO than before the IPO. The increase in the recommendation bias is greater among analysts of affiliated brokers and brokers that raise additional capital after their IPO than among other analysts. Newly listed broker firms experience significant increases in revenue and trading commission, and the increases are positively related to recommendation bias, after controlling for many other factors. More importantly, recommendation bias decreases as newly listed broker firms season and as the importance of trading commission declines. This suggests that public exposure through a broker firm’s IPO does not enhance the integrity and professional conduct of its financial analysts. Rather, economic incentives make financial analysts more accepting of unethical behavior. The overall results imply that the public trading of financial gatekeepers compromises the ethical relationship between financial service professionals and society in general.

AB - We investigate how a broker firm’s initial public offering (IPO) affects its analysts’ fiduciary duty of providing independent and objective recommendations. We find that the analysts of newly listed broker firms issue more positively biased recommendations in the first 2 to 3 years after their employers’ IPO than before the IPO. The increase in the recommendation bias is greater among analysts of affiliated brokers and brokers that raise additional capital after their IPO than among other analysts. Newly listed broker firms experience significant increases in revenue and trading commission, and the increases are positively related to recommendation bias, after controlling for many other factors. More importantly, recommendation bias decreases as newly listed broker firms season and as the importance of trading commission declines. This suggests that public exposure through a broker firm’s IPO does not enhance the integrity and professional conduct of its financial analysts. Rather, economic incentives make financial analysts more accepting of unethical behavior. The overall results imply that the public trading of financial gatekeepers compromises the ethical relationship between financial service professionals and society in general.

KW - Analyst recommendation

KW - Broker firms

KW - Ethical conduct

KW - Financial gatekeepers

KW - Initial public offering

UR - http://www.scopus.com/inward/record.url?scp=85055983587&partnerID=8YFLogxK

U2 - 10.1007/s10551-018-4044-6

DO - 10.1007/s10551-018-4044-6

M3 - Article

JO - Journal of business ethics

T2 - Journal of business ethics

JF - Journal of business ethics

SN - 1573-0697

ER -