Journal Article

Should Financial Gatekeepers be Publicly Traded?

Li, Mingsheng, Huang, Haozhi, Shi, Jing

2020

Overview

We investigate how a broker firm's initial public offering (IPO) affects its analysts' fiduciary duty of providing independent and objective recommendations. We find that the analysts of newly listed broker firms issue more positively biased recommendations in the first 2 to 3 years after their employers' IPO than before the IPO. The increase in the recommendation bias is greater among analysts of affiliated brokers and brokers that raise additional capital after their IPO than among other analysts. Newly listed broker firms experience significant increases in revenue and trading commission, and the increases are positively related to recommendation bias, after controlling for many other factors. More importantly, recommendation bias decreases as newly listed broker firms season and as the importance of trading commission declines. This suggests that public exposure through a broker firm's IPO does not enhance the integrity and professional conduct of its financial analysts. Rather, economic incentives make financial analysts more accepting of unethical behavior. The overall results imply that the public trading of financial gatekeepers compromises the ethical relationship between financial service professionals and society in general.

• Publisher: Springer,Springer Netherlands,Springer Nature B.V
• Subject: Analysts / Bias / Brokers / Business and Management / Business Ethics / Capital / Companies / Economic incentives / Education / Employee behavior / Employers / Ethics / Fiduciary responsibility / Financial analysis / Financial incentives / Incentives / Independence / Initial public offerings / Management / Morality / Original Paper / Philosophy / Professional conduct / Public finance / Quality of Life Research / Revenue / Stock brokers / Trading / Tribunals & commissions