Brokerage trading volume and analysts’ earnings forecasts: a conflict of interest?

Tiana Lehmer, Ben Lourie () and Devin Shanthikumar ()
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Ben Lourie: University of California, Irvine
Devin Shanthikumar: University of California, Irvine

Review of Accounting Studies, 2022, vol. 27, issue 2, No 2, 476 pages

Abstract: Abstract Using unique new data, we examine whether brokerage trading volume creates a conflict of interest for analysts. We find that earnings forecast optimism is associated with higher brokerage volume, even controlling for forecast and analyst quality, recommendations, and target prices. However, forecast accuracy is also significantly associated with higher volume. When analysts change brokerage houses, they bring trading volume with them, influencing trading volume at the new brokerage. This indicates that analysts drive the volume effects we observe. Consistent with a reward for generating volume, brokerage houses are less likely to demote analysts who generate more volume. Finally, analysts strategically adjust forecast optimism based on expected volume impact. Analysts become more (less) optimistic if their optimistic forecasts in the prior year were more (less) successful at generating volume. However, consistent with higher costs to increasing accuracy, analysts do not update accuracy based on expected volume impact. Overall, our results are consistent with a brokerage trading volume conflict of interest moving analysts towards more optimistic earnings forecasts, despite the volume reward for accuracy.

Keywords: Sell-side analysts; Brokerage houses; Trading volume; Commissions; Conflict of interest; Incentives; Earnings forecasts; G24; D82; M41; M52 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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DOI: 10.1007/s11142-021-09619-3

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