When do Banks Listen to Their Analysts? Evidence from Mergers and Acquisitions

We examine the conflicts of interest and the flow of information between divisions of financial institutions. Using data on analyst recommendations and stockholdings of investment banks advising acquirers in mergers, we find evidence that information from investment banking flows to other divisions of the bank. Specifically, following a merger announcement, changes in a bank's stockholdings of the acquirer are positively associated with changes in recommendations by its analyst. This relation, however, does not exist before the merger announcement. Additional tests show that the relation between stockholdings and recommendations following a merger announcement is strongest when conflicts of interest for analysts are likely smallest