Which Matters : 'Paying to Play' or Stable Business Relationship? Evidence on Analyst Recommendation and Mutual Fund Commission Fee Payment

This paper investigates the effect of stable business relationships between brokerage firms and mutual funds on analyst recommendations. Although the amount of commission fees a brokerage firm receives is the primary factor affecting recommendation aggressiveness of the brokerage firm's analysts, we find that analysts also issue more optimistic recommendations on stocks that are held by their brokerage firms' stably related funds (SRFs) than on stocks that are held by other funds. The effect is robust after controlling for commission fees, funds' shareholding and other factors. In addition, commission fees, fund size, and brokerage firms' resources are primary factors affecting the likelihood of maintaining a stable relationship between a brokerage firm and its client funds. Young funds, and especially those in small fund families, have more incentives to keep business ties with their current brokerage firms. A common ownership affiliation with a third institute further enhances the chance for the brokerage firm and the funds keep a stable relationship