Trade generation, reputation, and sell-side analysts

This paper examines the trade-generation and reputation-building incentives facing sell-side analysts. Using a unique data set I demonstrate that optimistic analysts generate more trade for their brokerage firms, as do high reputation analysts. I also find that accurate analysts generate higher reputations. The analyst therefore faces a conflict between telling the truth to build her reputation versus misleading investors via optimistic forecasts to generate short-term increases in trading commissions. In equilibrium I show forecast optimism can exist, even when investment-banking affiliations are removed. The conclusions may have important policy implications given recent changes in the institutional structure of the brokerage industry.