In a recent paper, authors Jesse Chan, Steve Lin, Yong Yu, and Wuyang Zhao review the ways in which owning stock in covered companies affects recommendations by analysts. The paper is based on a review of research reports from the period between 2003 and 2012 from 74 firms. They note that, despite concerns voiced about potential conflicts of interest, it is still fairly common for analysts to own stock in covered companies. Over the study period, however, the frequency of ownership of stock in covered companies declined significantly. The authors believe that this may be attributed to investment banking firms adopting prohibitions on stock ownership. The analysts that own stock tend to be more experienced, have higher prior-forecast frequency and accuracy and tend to work at smaller firms that have no underwriting relationship with the covered companies. The authors find that stock ownership tends to be associated with more effort undertaken in connection with the research coverage, which supports the argument that such analysts have "skin in the game" and are more highly motivated. The study does not find a relationship between stock ownership and the accuracy or the optimism of their earnings forecasts. However, ownership target forecasts issued by analysts with an ownership stake are less accurate and more optimistic. The authors also find that stock ownership enhances the credibility of the analyst recommendations, measured by assessing the price reactions to their reports. The study and conclusions may offer valuable information to regulators considering the framework applicable to research coverage.
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