What Drives Sell-Side Analyst Compensation at High-Status Investment Banks?

By Boris Groysberg, Paul M. Healy, David A. Maber. 2011

346 citations recorded by the source corpus.

We use proprietary data from a major investment bank to investigate factors associated with analysts’ annual compensation. We find compensation to be positively related to "All-Star" recognition, investment-banking contributions, the size of analysts’ portfolios, and whether an analyst is identified as a top stock-picker by the Wall Street Journal. We find no evidence that compensation is related to earnings forecast accuracy. But consistent with prior studies, we find analyst turnover to be related to forecast accuracy, suggesting that analyst forecasting incentives are primarily termination-based. Additional analyses indicate that "All-Star" recognition proxies for buy-side client votes on analyst research quality used to allocate commissions across banks and analysts. Taken as a whole, our evidence is consistent with analyst compensation being designed to reward actions that increase brokerage and investment-banking revenues. To assess the generality of our findings, we test the same relations using compensation data from a second high-status bank and obtain similar results.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/d9a0354c6b9366d80a55ea4f855d2117cbf2a12a

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Citations in the corpus

• Political contributions and analyst behavior (2015, neutral): “Moreover, Groysberg et al. (2011) find no evidence that sell-side analysts’ compensation is related to their earnings accuracy.”
• Do Analysts Matter for Governance? Evidence from Natural Experiments (2015, background): “…which results in an optimistic bias in earnings forecasts (e.g. Das et al., 1998; Gu and Wu, 2003; O’Brien et al., 2005; Ke and Yu, 2006; Mola and Guidolin, 2009; Groysberg et al., 2011).3 There is a striking paucity of papers that have explicitly tested for a corporate governance role of analysts.”
• Who Uses Financial Reports and for What Purpose? Evidence from Capital Providers (2014, neutral): “Analysts’ earnings forecasts are optimistic on average, which is often attributed to them maintaining good relationships with management and to investment-banking ties between issuers and analysts’ employers (Hunton and McEwen, 1997; Das et al., 1998; Lin and McNichols, 1998; Lim, 2001; O’Brien et a”
• Analyst Initiations of Coverage and Stock Return Synchronicity (2012, neutral): “implies that analysts will choose to gather and disseminate low-cost information because it allows them to follow a larger set of stocks, and covering more stocks enables analysts to increase trading commissions, attract more investment banking business, and increase their compensation (Groysberg et”
• Seeing is believing: analysts’ corporate site visits (2016, background): “A typical analyst hosts around one field trip per month in a medium-sized full-service broker-dealer (Groysberg et al. 2011).”
• Uncovering expected returns: Information in analyst coverage proxies (2017, neutral): “, Womack, 1996; Bradshaw, 2002; Groysberg et al., 2011 ). For example, McNichols and O’Brien (1997) show the distribution of analysts’ buy/sell recommendations are positively skewed because analysts are averse to conveying negative signals and that analysts add (drop) coverage of firms that have hig”
• Analyst Career Concerns, Effort Allocation, and Firms’ Information Environment (2018, neutral): “…more broadly based on their knowledge and understanding of firms and industries and their activities of producing value relevant information or helping institutional clients obtain such information (Brown et al. (2015), Groysberg, Healy, and Maber (2011), and Maber, Groysberg, and Healy (2014)).”
• Before an Analyst Becomes an Analyst: Does Industry Experience Matter? (2015, neutral): “Using analyst compensation data from an anonymous high status investment bank, Groysberg, Healy, and Maber (2011) suggest that II all-star analysts earn 61% higher compensation than their unrated peers.”