Caveat Emptor! After All the Regulatory Hoopla, Securities Analysts Remain Conflicted on Wall Street

In the late 1990s, many investors entered the stock market seeking for-tunes promised by an ever-rising market. Along with this democratiza-tion of the stock market, dedicated financial news television stations and publications sought a wider audience, often elevating securities analysts to celebrity status. Many new investors accepted such analysts’ research as impartial, unaware of analysts’ often divided interests.The author examines the common conflicts of interest between securities analysts, investment bankers, and the companies analysts evaluate and considers their implications. The author then analyzes several possible solutions. While a complete separation of analyst research from invest-ment banking is overly broad, the author argues the current industry rules, regulations, and standards cannot be strengthened without poten-tially reducing the amount of analysis available. At the same time, the author argues that analysts affiliated with investment banks will inevita-bly be subject to some pressure to serve underwriters and companies ra-ther than investors. Consequently, the author recommends addressing the challenge of informing nonprofessional investors of sell-side analysts’ divided interests by characterizing their reports as sales literature or marketing material.

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