Incentives of Financial Analysts: Trading Turnover and Compensation

Are sell-side security analysts paid for turnover-generating research? Using hand-collected annual income data from tax records in Sweden, I show that analysts' compensations increase in the trading turnover that their recommendations generate. Analysts are paid 0.002 percent of broker-trading volume, or approximately 1 percent of broker's commission revenues. This broker-turnover analyst-pay relationship is strongest when analysts' research induces trading in investment banking clients' stocks, especially when the direct compensation for collaborating with an investment-banking department is more likely to be restricted. Additional analyses indicate that the relationship is significant only for the more experienced analysts and for positive recommendations. These findings empirically validate the previously assumed turnover-compensation link and may have policy implications related to the Markets in Financial Instruments Directive.