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The Revolving-Door of Sell-Side Analysts: A Threat to Analysts’ Independence?


The “revolving-door” phenomenon whereby analysts are hired by firms that they cover poses a threat to their independence. In this paper, I document this phenomenon and assess the extent to which it is associated with analysts’ issuance of biased research reports during the year prior to their employment with the covered firms. During this final year, I find that the revolving-door analysts alter their forecasts, target prices and recommendations in a direction which suggests that they are attempting to gain favor with their would-be employers. Specifically, relative to other analysts, they become more optimistic about the firms that end up hiring them while, at the same time, they become more pesimistic about other firms’ prospects. The findings raise concerns about their independence and indicate a potential benefit to tightening employment regulations in this industry.

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