Do Underwriting Activities Bias Investment Banks’ Buy Recommendations? Lessons from the Latin American Bond Markets

Sebastián Nieto-Parra ()

International Finance, 2014, vol. 17, issue 3, 323-355

Abstract: type="main" xml:lang="en">

This paper examines whether banks’ recommendations to investors in the Latin American sovereign bond market are truly independent of the same banks’ underwriting activities in these countries. The main findings are the following. First, after controlling for macroeconomic and financial variables, I find that investment banks tend to provide optimistic recommendations to investors in sovereign bonds on which they act as lead managers. Second, econometric analysis shows that this association increases with the underwriting fee. These results are consistent with interviews with the main institutional investors in sovereign bonds. The findings of this research suggest the existence of a conflict of interest between the origination and research departments of investment banks in the Latin American bond market.

Date: 2014
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