Consider analyst i who at time t covers several stocks k
The analyst’s reputation and the bank’s reputation and brokerage considerations do not vary across the stocks
… yet the trade-off between career concerns and IB considerations differs across stocks k …
… in line with each stock’s institutional ownership and the relationship between k and the analyst’s bank.
Thus, holding the analyst constant, we expect different behavior across the companies covered, with more aggressive recommendations for relationship clients and less aggressive recommendations for companies predominantly owned by institutions.
Motivation Objective The model Results Conclusions • • • • • • • • • • • •
Run model for subsample of large firms, defined as the five largest firms in each three-digit SIC code, ranked quarterly by sales.
Analysts arguably have less discretion with respect to covering the largest companies.
Run Heckman (1979) selection model on full sample
Step 1: Model whether a given analyst i covers a given stock k. To instrument the choice, we include the fraction of firms in company k’s Fama-French (1997) industry that analysts at i’s bank cover at time t. The broader the bank’s existing coverage of an industry, the lower the cost of covering company k’s stock. This variable is uncorrelated with the second-step residuals.
Step 2: Estimate using the MLE version of Heckman (1979).