Was it global and has it been settled? The impact of the Global Research Analyst Settlement and other early 2000s sell-side analyst reforms

Abstract

This paper examines the impact of the early 2000s sell-side analyst reforms, which include NYSE Rule 472, NASD Rule 2711, the Sarbanes-Oxley Act Section 501, Regulation AC, and the Global Research Analyst Settlement. Using a sample of 452,153 recommendations issued on 11,902 companies by 762 unique research firms over the sample period of 1993 to 2012, I regress the average three-day event-period market returns on an indicator variable for analyst firm type, an indicator variable for the recommendation rating type, an indicator variable for analyst firm location and their interaction terms to observe the analyst recommendations’ conditional informativeness and unconditional informativeness. I find that optimistic stock recommendation ratings have become scarcer and more informative after the reforms but neutral and pessimistic recommendation ratings have become more frequent and less informative. The overall information quality has decreased for domestic investment banks, domestic independent research firms, and foreign independent research firms, but not for foreign investment banks. Although most of the early 2000s sell-side analyst reforms were enacted for analysts within the U.S., I observe their impact on foreign research firms as well.