Buy recommendations from independent research firms with no investment banking business carry more weight than the same recommendations from investment banks, a new study shows. In fact, the three college professors who conducted the study found that between 1996 and the middle of 2003, the performance of the stock recommendations by independent research firms topped the banks’ recommendations by 8%.

In an analysis by UCLA accounting professor Brett Trueman, University of Michigan assistant accounting professor Reuven Lehavy and Cal-Davis finance professor Brad Barber, however, independent research firms were 4.5% worse than the investment banks in their hold and sell advice. But the three concluded that their most striking results came from the buy side.

"These results suggest that the underperformance of investment bank buy recommendations was at least partly due to a reluctance to downgrade stocks whose prospects dimmed during the early 2000's bear market, as claimed in the SEC's global analyst research settlement," Barber said.

The underperformance by banks in their buy categories were not just limited to the banks sanctioned by the research settlement, but also to banks not sanctioned. Lehavy added: "This uniform underperformance suggests that differentiating between the sanctioned and non-sanctioned banks, in terms of the requirement that independent research be distributed to clients, may not be justified."

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