Regulations and Brain Drain: Evidence from Wall Street Star Analysts’ Career Choices

Yuyan Guan (), Congcong Li (), Hai Lu () and M. H. Franco Wong ()
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Yuyan Guan: College of Business, City University of Hong Kong, Kowloon, Hong Kong SAR, China
Congcong Li: Duquesne University, Pittsburgh, Pennsylvania 15282
Hai Lu: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada; Guanghua School of Management, Peking University, 100871 Beijing, China
M. H. Franco Wong: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada

Management Science, 2019, vol. 65, issue 12, 5766-5784

Abstract: The Global Settlement, along with related regulations in the early 2000s, prohibits the use of investment banking revenue to fund equity research and compensate equity analysts. We find that all-star analysts from investment banks are more likely to exit the profession or move to the buy side after the regulations. The departed star analysts’ earnings revisions and stock recommendations are more informative than those of the remaining analysts who followed the same companies. To the extent that star analysts are superior to their nonstar counterparts in terms of research ability and ability to inform the market, the exit of star analysts represents a brain drain in the sell-side equity research industry. These results are consistent with the view that the regulations introduced to protect equity investors have unintended adverse effects on the investors due to a brain drain in investment banks.

Keywords: analysts; turnover; brain drain; the Global Settlement; Sarbanes–Oxley Act; policy and regulations; investment banks (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (13)

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