Brokerage Relationships and Analyst Forecasts: Evidence from the Protocol for Broker Recruiting

In this study, we offer novel evidence on how the nature of brokerage-client relationships can influence the quality of equity research. We exploit a unique setting provided by the Protocol for Broker Recruiting to examine whether relaxed broker non-compete agreement (NCA) enforcement generates spillover effects on sell-side analysts. Entry into this agreement reassigns ownership of the client relationship from the brokerage house to individual brokers, potentially generating a greater standard of care. Using a generalized difference-in-difference research design, we provide evidence consistent with brokers reducing pressure on analysts to produce optimistic research following protocol entry. This effect is concentrated among less experienced and non-All Star analysts, who previously may have faced the greatest pressures to sacrifice objectivity. Additionally, we find that analysts issue more accurate forecasts and generate reports with heightened market reactions following protocol entry. Our collective evidence sheds new light on how the nature of brokerage relationships can influence analysts’ research production.