Optimism bias in financial analysts earnings forecasts: do - - PowerPoint PPT Presentation

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Optimism bias in financial analysts’ earnings forecasts: do Commission sharing agreements reduce conflicts of interest?

Sébastien Galanti1 Anne-Gaël Vaubourg2

• 1Univ. Orléans, LEO, France
• 2Univ. Bordeaux, LAREFI, France

GdRE 2016 Clermont-Ferrand, 6-7 July 2016 Université d’Auvergne, CERDI

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Outline

1

Conflicts of interests in finance : the example of earnings forecasts

2

The goal of CSA regulation : reduce analysts’ optimism

3

Data and method

4

Results

5

Discussion

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

Conflicts of interest : trading commission incentive

Conflicts of interest in finance

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

Conflicts of interest : trading commission incentive

Conflicts of interest in finance

When an agent faces conflicting incentives

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

Conflicts of interest : trading commission incentive

Conflicts of interest in finance

When an agent faces conflicting incentives Achieving objective A prevents achieving objective B

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

Conflicts of interest : trading commission incentive

Conflicts of interest in finance

When an agent faces conflicting incentives Achieving objective A prevents achieving objective B

Application : "sell-side" stock analysts in brokerage houses

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

Conflicts of interest : trading commission incentive

Conflicts of interest in finance

When an agent faces conflicting incentives Achieving objective A prevents achieving objective B

Application : "sell-side" stock analysts in brokerage houses

Broker : maximize trading commission fees

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

Conflicts of interest : trading commission incentive

Conflicts of interest in finance

When an agent faces conflicting incentives Achieving objective A prevents achieving objective B

Application : "sell-side" stock analysts in brokerage houses

Broker : maximize trading commission fees Analyst : provide independent research to clients

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

Conflicts of interest : trading commission incentive

Conflicts of interest in finance

When an agent faces conflicting incentives Achieving objective A prevents achieving objective B

Application : "sell-side" stock analysts in brokerage houses

Broker : maximize trading commission fees Analyst : provide independent research to clients Earnings forecast "in line" with consensus : no trade (i.e. no profit)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

Conflicts of interest : trading commission incentive

Conflicts of interest in finance

When an agent faces conflicting incentives Achieving objective A prevents achieving objective B

Application : "sell-side" stock analysts in brokerage houses

Broker : maximize trading commission fees Analyst : provide independent research to clients Earnings forecast "in line" with consensus : no trade (i.e. no profit) ⇒ Incentive to issue biased (optimistic) forecasts to generate trading commissions.

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

The literature

Vast literature on analysts’ accuracy and optimism (e.g. Ramnath et al. 2008). Here : commission incentive.

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

The literature

Vast literature on analysts’ accuracy and optimism (e.g. Ramnath et al. 2008). Here : commission incentive. Hayes (1998), Jackson (2005), Mehran and Stulz (2007) :

• ptimistic analysts do generate more trading commissions

for their brokerage firm

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

The literature

Vast literature on analysts’ accuracy and optimism (e.g. Ramnath et al. 2008). Here : commission incentive. Hayes (1998), Jackson (2005), Mehran and Stulz (2007) :

• ptimistic analysts do generate more trading commissions

for their brokerage firm "Optimism" or "biased forecasts" : Earnings forecasts > Realized earnings

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

The literature

Vast literature on analysts’ accuracy and optimism (e.g. Ramnath et al. 2008). Here : commission incentive. Hayes (1998), Jackson (2005), Mehran and Stulz (2007) :

• ptimistic analysts do generate more trading commissions

for their brokerage firm "Optimism" or "biased forecasts" : Earnings forecasts > Realized earnings The clients : mostly mutual funds and pension funds (cf Brown et al. 2015) : optimism can be detrimental to their wealth (De Franco, Lu and Vasvari 2007)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

The literature (cont’d)

Many reforms attempt to curb conflicts of interest in analysts’ research (Epsahbodi et al. 2015)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

The literature (cont’d)

Many reforms attempt to curb conflicts of interest in analysts’ research (Epsahbodi et al. 2015)

The US "Global Settlement" (GS) of 2002 (Kadan et al. 2009, Clark et al. 2011, Guan et al. 2012) : 12 large investment banks must clearly separate financial research departments and investment banking activities. Results : ⇓ optimistic earnings forecasts

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

The literature (cont’d)

Many reforms attempt to curb conflicts of interest in analysts’ research (Epsahbodi et al. 2015)

The US "Global Settlement" (GS) of 2002 (Kadan et al. 2009, Clark et al. 2011, Guan et al. 2012) : 12 large investment banks must clearly separate financial research departments and investment banking activities. Results : ⇓ optimistic earnings forecasts The European "Market Abuse Directive" of 2003 (Dubois, Frésard, Dumontier 2014) : it reduced optimism in analysts’ recommendations

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Conflict of interest : trading commission incentive Literature on optimistic earnings forecasts Literature on regulation

The literature (cont’d)

Many reforms attempt to curb conflicts of interest in analysts’ research (Epsahbodi et al. 2015)

The US "Global Settlement" (GS) of 2002 (Kadan et al. 2009, Clark et al. 2011, Guan et al. 2012) : 12 large investment banks must clearly separate financial research departments and investment banking activities. Results : ⇓ optimistic earnings forecasts The European "Market Abuse Directive" of 2003 (Dubois, Frésard, Dumontier 2014) : it reduced optimism in analysts’ recommendations

No study on the french 2007 reform on "Commission Sharing Agreements (CSA)"

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion The regulation on CSA Main Hypothesis

Outline

1

Conflicts of interests in finance : the example of earnings forecasts

2

The goal of CSA regulation : reduce analysts’ optimism

3

Data and method

4

Results

5

Discussion

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion The regulation on CSA Main Hypothesis

The french regulation on Commission Sharing Agreements (CSA)

Before 2007 : funds pay the broker for execution and research

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion The regulation on CSA Main Hypothesis

The french regulation on Commission Sharing Agreements (CSA)

Before 2007 : funds pay the broker for execution and research The idea : separate execution fees and research fees

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion The regulation on CSA Main Hypothesis

The french regulation on Commission Sharing Agreements (CSA)

Before 2007 : funds pay the broker for execution and research The idea : separate execution fees and research fees Example Mutual Fund Groupama AM signs a CSA with broker SG

• Securities. The Agreement states that, when passing a stock
• rder with this broker, a fraction of the fee is transferred to a

third-party (independent research firm, other broker’s research department, etc.)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion The regulation on CSA Main Hypothesis

Regulation on CSA, cont’d

This makes research independent from trading commission incentives The rule is implemented on 18 May, 2007 and applies to funds domiciled in France

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion The regulation on CSA Main Hypothesis

Expected impact : less optimism bias

Sell-Side Analysts no longer have reasons to induce the fund managers to buy stocks

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion The regulation on CSA Main Hypothesis

Expected impact : less optimism bias

Sell-Side Analysts no longer have reasons to induce the fund managers to buy stocks "Pure" research firms (not research departments of brokers and/or Investment Banks), which are less subject to conflicts of interest, should be favored

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion The regulation on CSA Main Hypothesis

Expected impact : less optimism bias

Sell-Side Analysts no longer have reasons to induce the fund managers to buy stocks "Pure" research firms (not research departments of brokers and/or Investment Banks), which are less subject to conflicts of interest, should be favored Hypothesis The implementation of CSA rule reduces optimism bias in analysts forecasts on French firms

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Outline

1

Conflicts of interests in finance : the example of earnings forecasts

2

The goal of CSA regulation : reduce analysts’ optimism

3

Data and method

4

Results

5

Discussion

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Data

I/B/E/S and Worldscope data extracted with ThomsonReuters on Jan. 2012

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Data

I/B/E/S and Worldscope data extracted with ThomsonReuters on Jan. 2012 One year Earnings Per Share (EPS) forecasts about 58 french firms in the Euronext100, from 3746 analysts working for 175 brokers, on a monthly basis

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Data

I/B/E/S and Worldscope data extracted with ThomsonReuters on Jan. 2012 One year Earnings Per Share (EPS) forecasts about 58 french firms in the Euronext100, from 3746 analysts working for 175 brokers, on a monthly basis After cleanings, 58,984 firm-month-analyst observations

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Data

I/B/E/S and Worldscope data extracted with ThomsonReuters on Jan. 2012 One year Earnings Per Share (EPS) forecasts about 58 french firms in the Euronext100, from 3746 analysts working for 175 brokers, on a monthly basis After cleanings, 58,984 firm-month-analyst observations No data about who signed a CSA.

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Data

I/B/E/S and Worldscope data extracted with ThomsonReuters on Jan. 2012 One year Earnings Per Share (EPS) forecasts about 58 french firms in the Euronext100, from 3746 analysts working for 175 brokers, on a monthly basis After cleanings, 58,984 firm-month-analyst observations No data about who signed a CSA. CSA applies to French (established in France) Funds. French Funds mostly hold French firms stocks (44% of their stocks). French stocks mostly held by French Funds (20% of the CAC40 index)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Data

I/B/E/S and Worldscope data extracted with ThomsonReuters on Jan. 2012 One year Earnings Per Share (EPS) forecasts about 58 french firms in the Euronext100, from 3746 analysts working for 175 brokers, on a monthly basis After cleanings, 58,984 firm-month-analyst observations No data about who signed a CSA. CSA applies to French (established in France) Funds. French Funds mostly hold French firms stocks (44% of their stocks). French stocks mostly held by French Funds (20% of the CAC40 index) ⇒ Studying french stocks is the most reasonable proxy for studying firms traded by french funds.

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Dependent variable

We follow Hovakimian and Saenyasiri (2010, 2014) : average ("consensus") optimism about a firm OPTIMi,t =

• j

100(Fi,t − Ai,t)/Pi,t

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Dependent variable

We follow Hovakimian and Saenyasiri (2010, 2014) : average ("consensus") optimism about a firm OPTIMi,t =

• j

100(Fi,t − Ai,t)/Pi,t Fi,t average (on J analysts) forecast for firm i at time t, Ai,t the Actual earnings

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Dependent variable

We follow Hovakimian and Saenyasiri (2010, 2014) : average ("consensus") optimism about a firm OPTIMi,t =

• j

100(Fi,t − Ai,t)/Pi,t Fi,t average (on J analysts) forecast for firm i at time t, Ai,t the Actual earnings The difference is scaled by the stock price

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Model

OPTIMi,t = α + β1CSA + β2GROWTHt + β3EPSNEGATIVEi,t +β4EPSDECLINEi,t + β5MONTHt + β6COVERi,t +β7SIZEi,t + ǫ CSA = 1 after May 18, 2007. Exp. sign : (−)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Model

OPTIMi,t = α + β1CSA + β2GROWTHt + β3EPSNEGATIVEi,t +β4EPSDECLINEi,t + β5MONTHt + β6COVERi,t +β7SIZEi,t + ǫ CSA = 1 after May 18, 2007. Exp. sign : (−) Challenge : control for the impact of the Great Financial Crisis (e.g. Kadan et al. 2009 ; Hovakimian et al. 2014)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Model

OPTIMi,t = α + β1CSA + β2GROWTHt + β3EPSNEGATIVEi,t +β4EPSDECLINEi,t + β5MONTHt + β6COVERi,t +β7SIZEi,t + ǫ CSA = 1 after May 18, 2007. Exp. sign : (−) Challenge : control for the impact of the Great Financial Crisis (e.g. Kadan et al. 2009 ; Hovakimian et al. 2014) ⇒ Macro conditions : GROWTHt. If recession (lower growth) : more optimism. Exp. sign : (−)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Model

OPTIMi,t = α + β1CSA + β2GROWTHt + β3EPSNEGATIVEi,t +β4EPSDECLINEi,t + β5MONTHt + β6COVERi,t +β7SIZEi,t + ǫ CSA = 1 after May 18, 2007. Exp. sign : (−) Challenge : control for the impact of the Great Financial Crisis (e.g. Kadan et al. 2009 ; Hovakimian et al. 2014) ⇒ Macro conditions : GROWTHt. If recession (lower growth) : more optimism. Exp. sign : (−) ⇒ Firm-level : EPS variables. Greater (F − A) if A ⇓. Exp. sign :(+)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Model, cont’d

Pattern : more optimism beginning of fiscal year, more pessimistic at the end (Libby et al. 2008) : MONTHt exp. sign : (−)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Model, cont’d

Pattern : more optimism beginning of fiscal year, more pessimistic at the end (Libby et al. 2008) : MONTHt exp. sign : (−) Less optimism if numerous analysts to compare with (Herrman et al. 2008 ; Dubois et al. 2014) : COVERi,t exp. sign : (−)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Model, cont’d

Pattern : more optimism beginning of fiscal year, more pessimistic at the end (Libby et al. 2008) : MONTHt exp. sign : (−) Less optimism if numerous analysts to compare with (Herrman et al. 2008 ; Dubois et al. 2014) : COVERi,t exp. sign : (−) Related idea : firm size as a proxy for available information (Das et al., 1988 ; Lim, 2001) : SIZEi,t exp. sign : (−)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Estimation

OLS

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Estimation

OLS T-stats adjusted for heteroskedasticity and within-broker error clustering

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Estimation

OLS T-stats adjusted for heteroskedasticity and within-broker error clustering Additional controls for the Great Financial Crisis effect :

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Estimation

OLS T-stats adjusted for heteroskedasticity and within-broker error clustering Additional controls for the Great Financial Crisis effect :

year fixed effects (Guan et al., 2012 ; Dubois et al., 2014 ; Hovakimian et al., 2014)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Data Optimism Model Estimation

Estimation

OLS T-stats adjusted for heteroskedasticity and within-broker error clustering Additional controls for the Great Financial Crisis effect :

year fixed effects (Guan et al., 2012 ; Dubois et al., 2014 ; Hovakimian et al., 2014) firm-year fixed effects (Herrman et al., 2008)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Outline

1

Conflicts of interests in finance : the example of earnings forecasts

2

The goal of CSA regulation : reduce analysts’ optimism

3

Data and method

4

Results

5

Discussion

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Main Results

Variables (expected sign) [1] [2] [3] CSA (-)

• 0.2160∗∗∗
• 0.1148∗∗
• 0.1188∗∗∗

(0.0292) (0.0496) (0.0486) GROWTH (-)

• 0.2709∗∗∗
• 0.3562∗∗∗
• 0.3597∗∗∗

(0.0148) (0.0199) (0.0209) EPSNEGATIVE (+) 7.1219∗∗∗ 7.1625∗∗∗ 7.1752∗∗∗ (0.1365) (0.0663) (0.0659) EPSDECLINE (+) 2.0194∗∗∗ 1.9111∗∗∗ 1.9113∗∗∗ (0.0455) (0.0318) (0.0318) MONTH (-)

• 0.0243∗∗∗

−0.0309∗∗∗

• 0.0286∗∗∗

(0.0025) (0.0033) (0.0032) COVER (-) 0.0305∗∗∗ 0.0394∗∗∗ 0.0373∗∗∗ (0.0018) (0.0022) (0.0020) SIZE (-)

• 0.3180∗∗∗
• 0.0207

(0.0512) (0.0135) Year effects no yes yes Firm-year effects yes no no

• Nb. obs.

54,962 55,024 55,024 Adjusted R2 0.8771 0.5861 0.5861

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Comments

The CSA regulation succeeds in reducing the optimism of analysts

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Comments

The CSA regulation succeeds in reducing the optimism of analysts We confirm results about US or European regulations (Kadan et al. 2009, Clarke et al. 2011, Guan et al. 2012, Dubois et al. 2014, Hovakimian et al. 2014)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Comments

The CSA regulation succeeds in reducing the optimism of analysts We confirm results about US or European regulations (Kadan et al. 2009, Clarke et al. 2011, Guan et al. 2012, Dubois et al. 2014, Hovakimian et al. 2014) All else equal, following CSA, the bias decreased by 0.22%

• f the stock price (mean sample bias is 0.76%)
• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Comments

The CSA regulation succeeds in reducing the optimism of analysts We confirm results about US or European regulations (Kadan et al. 2009, Clarke et al. 2011, Guan et al. 2012, Dubois et al. 2014, Hovakimian et al. 2014) All else equal, following CSA, the bias decreased by 0.22%

• f the stock price (mean sample bias is 0.76%)

COVER is positive and SIZE poorly significant, but this joins up with the empirical literature. All other variables bear the expected sign.

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Extension : Global Settlement

International impact of the US "‘Global Settlement"’ (GS) in Hovakimian et al., 2014.

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Extension : Global Settlement

International impact of the US "‘Global Settlement"’ (GS) in Hovakimian et al., 2014. Rationale

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Extension : Global Settlement

International impact of the US "‘Global Settlement"’ (GS) in Hovakimian et al., 2014. Rationale

the 12 large banks involved represent 20% of our

• bservations (groups of analysts covering many different

countries + the NASD has required that the foreign associates of its members also comply with GS rules)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Extension : Global Settlement

International impact of the US "‘Global Settlement"’ (GS) in Hovakimian et al., 2014. Rationale

the 12 large banks involved represent 20% of our

• bservations (groups of analysts covering many different

countries + the NASD has required that the foreign associates of its members also comply with GS rules) possible spillover effects on their foreign competitors

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Extension : Global Settlement

International impact of the US "‘Global Settlement"’ (GS) in Hovakimian et al., 2014. Rationale

the 12 large banks involved represent 20% of our

• bservations (groups of analysts covering many different

countries + the NASD has required that the foreign associates of its members also comply with GS rules) possible spillover effects on their foreign competitors

Additional explanatory variable : GS=1 after 20th December 2002 (-)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

GS effect

Variables (expected sign) [1] [2] [3] CSA (-)

• 0.2172∗∗∗
• 0.1172∗∗
• 0.1213∗∗

(0.0290) (0.0497) (0.0487) GS (-)

• 0.4043∗∗
• 0.7160∗∗∗
• 0.7138∗∗∗

(0.1917) (0.2670) (0.2672) GROWTH (-)

• 0.2711∗∗∗
• 0.3571∗∗∗
• 0.3607∗∗∗

(0.0148) (0.0198) (0.0207) EPSNEGATIVE (+) 7.1205∗∗∗ 7.1632∗∗∗ 7.1763∗∗∗ (0.1365) (0.0664) (0.0660) EPSDECLINE (+) 2.0188∗∗∗ 1.9108∗∗∗ 1.9110∗∗∗ (0.0454) (0.0318) (0.0318) MONTH (-)

• 0.0241∗∗∗

−0.0306∗∗∗

• 0.0282∗∗∗

(0.0025) (0.0033) (0.0031) COVER (-) 0.0305∗∗∗ 0.0395∗∗∗ 0.0373∗∗∗ (0.0018) (0.0022) (0.0020) SIZE (-)

• 0.3201∗∗∗
• 0.0213

(0.0512) (0.0135) Year effects no yes yes Firm-year effects yes no no

• Nb. obs.

54,962 54,962 54,962 Adjusted R2 0.8805 0.5862 0.5862

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Complementarity between regulations

Both reduce the conflict of interest in making earnings forecasts for french firms

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Complementarity between regulations

Both reduce the conflict of interest in making earnings forecasts for french firms They are complementary :

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Complementarity between regulations

Both reduce the conflict of interest in making earnings forecasts for french firms They are complementary :

CSA is designed for trading commission incentives

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion Main Results Extension : Global Settlement

Complementarity between regulations

Both reduce the conflict of interest in making earnings forecasts for french firms They are complementary :

CSA is designed for trading commission incentives GS rather for reducing the influence of the Investment Bank

• n research analysts. (Within the same financial group,

pressure from Investment Bank to please firm management in order to generate underwriting, IPO or SEO contracts)

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Outline

1

Conflicts of interests in finance : the example of earnings forecasts

2

The goal of CSA regulation : reduce analysts’ optimism

3

Data and method

4

Results

5

Discussion

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Discussion

Contribution

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Discussion

Contribution

CSA rules curb the conflicts of interest between financial research and brokerage activities

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Discussion

Contribution

CSA rules curb the conflicts of interest between financial research and brokerage activities This result holds when accounting for the international impact of the GS : both regulations are complementary

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Discussion

Contribution

CSA rules curb the conflicts of interest between financial research and brokerage activities This result holds when accounting for the international impact of the GS : both regulations are complementary

Research agenda

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Discussion

Contribution

CSA rules curb the conflicts of interest between financial research and brokerage activities This result holds when accounting for the international impact of the GS : both regulations are complementary

Research agenda

Investigating the impact of unbundling rules implemented in the UK in 2006

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Discussion

Contribution

CSA rules curb the conflicts of interest between financial research and brokerage activities This result holds when accounting for the international impact of the GS : both regulations are complementary

Research agenda

Investigating the impact of unbundling rules implemented in the UK in 2006 Precise data about which brokers signed a CSA with mutual funds

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)

Conflicts of interests in finance : the example of earnings forecasts The goal of CSA regulation : reduce analysts’ optimism Data and method Results Discussion

Thanks !

• S. Galanti and A-G Vaubourg

Commission Sharing Agreements (CSA)