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Wall Street conflict-of-interest crackdown led to star analyst brain drain, new research shows.

November 14, 2018

Toronto – Wall Street saw a serious brain drain of top investment bank analysts following conflict-of-interest reforms 15 years ago that were designed to protect investors from potentially biased analyst reports, a new study shows.

Along with it, there was a drop in the quality of information investors received.  The study represents the first empirical evidence of a long-suspected analysts’ talent flight in the aftermath of the 2003 “Global Analyst Research Settlement,” and related changes.

The departure rate of star “sell-side” analysts climbed from 5.1% before the reforms, to 11.8% after, compared to no change in the departure rate among analysts at non-investment banks, the study showed.

“Regulators try to help investors, but that doesn’t always lead to good things. The entire market is an eco-system; when you push on one side, you don’t know what that will shift on the other side,” said Hai Lu, a professor of accounting at the University of Toronto’s Rotman School of Management. He co-wrote the study with Prof. Franco Wong of the Rotman School and  authors from Singapore Management University and City University of Hong Kong.

The reforms led to a “significant reduction” in analysts’ compensation, which was cut nearly in half, from just over $1.1 million in 2001 to about $648,000 in 2005, according to previous research. The big drop was in commissions and bonuses, which could no longer be tied to an investment bank’s earnings.

The Global Settlement was an agreement between U.S. financial regulators, including the U.S. Securities and Exchange Commission, and 10 of the country’s largest investment banking houses. It came after concerns that research analysts were issuing biased and favorable recommendations about companies whose business their banks courted.

The settlement aimed to sequester an investment bank’s securities research activities from its investment banking function. Analysts’ compensation could no longer be tied to the investment bank’s revenue, and the equities side could not be involved in setting the research division’s budget.

In the aftermath, nearly one third of the departing star sell-side analysts moved to hedge funds, private equity, venture capital firms and other “buy-side” activities, the study found.

“Star” analysts are those who make an annual list of top research performers as voted by buy-side portfolio managers. The study found that those star analysts who left the sell-side after the reforms issued better quality information than those who replaced them, measured by a stronger market response to their reports.

That may not only “adversely affect” consumers of their research, but the companies they analyzed too, the study concludes.

The paper is forthcoming in Management Science and is online at

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