Does Syndicate Pressure Affect Analysts’ Incentive to Produce Information? Evidence from Recommended Firms’ Securities Class Action Lawsuits

We propose that syndicate pressure distorts unaffiliated analysts' incentive to produce information. To examine this newly proposed conflict of interest problem, we separate unaffiliated analysts into two types. The first type is the analysts employed by syndicate banks, which do not have direct underwriting relationships with the recommended firms but have participated in the affiliated main banks' syndicates (the underwriters of recommended firms). The second type is independent banks, which do not have underwriting relationships with the recommended firms or syndication relationships with the main banks.Syndicate pressure refers to syndicate banks' analysts being cooperative or acting like main banks' analysts so as to enhance their banks' chance to participate in future underwriting syndicates. We further distinguish syndicate bank types by their roles as co-managers or co-lead syndicate members because co-managers tend to be smaller underwriters and do not have the same capacity to organize their own syndicates as co-lead syndicate banks. Therefore, co-manager partners are more susceptible to syndicate pressure than co-lead syndicate banks. Using a novel event, the securities class action lawsuits, we are able identify unique private information production periods prior to the public's knowledge of the wrongdoings. Therefore, we can examine the timeliness of private information dissemination by various types of analysts. Consistent with the “syndicate pressure” hypothesis, we find that unaffiliated analysts employed by co-manager syndicate banks issue downgrade revisions no sooner than those employed by the affiliated main banks. On the other hand, unaffiliated analysts employed by co-lead syndicate banks and independent banks issue downgrade revisions significantly more promptly than those of main banks. In addition, we document that Global Settlement appears to improve analysts' independence, particularly among main banks, which are subject to the greatest level of conflicts of interest, and co-manager syndicate banks, which are susceptible to syndicate pressure from main banks