Regulating Securities Analysts

We examine the effects of regulations designed to address the potential conflict of interest that arises when sell-side analyst research is not independent of investment banking. We focus on two types of regulation: (1) barriers between equity research and investment banking that restrict the flow of information (i.e., Chinese Walls); and (2) mandatory disclosure of analyst compensation. We show that information barriers can increase research effort and improve report quality by limiting a brokerage firm's ability to distort its analyst's incentives. However, this type of regulation can also reduce information production and lower the quality of reports if a brokerage derives intrinsic benefits from its analyst's research activity. In contrast to imposing information barriers, requiring a brokerage to disclose its analyst's pay always leads to greater information production and report quality