Incentives of Financial Analysts: Trading Turnover and Compensation

Research output: Working paperAcademic

Abstract

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.
Original languageEnglish
PublisherSSRN
Publication statusPublished - 2019

Fingerprint

Incentives
Analysts
Turnover
Financial analysts
Broker
Investment banking
Income
Revenue
Trading volume
Tax
Sweden
Security analysts
Policy implications
Financial instruments

Bibliographical note

2nd R&R at Journal of Financial and Quantitative Analysis

Keywords

  • compensation
  • analyst
  • stock recommendation
  • broker

Cite this

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abstract = "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.",
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Incentives of Financial Analysts: Trading Turnover and Compensation. / Karmaziene, Egle.

SSRN, 2019.

Research output: Working paperAcademic

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