Optimism Bias in Financial Analysts' Earnings Forecasts: Do Commission-Sharing Agreements Reduce Conflicts of Interest?

Abstract

Implemented in May 2007, the French rules governing commission-sharing agreements (CSAs) consist of unbundling brokerage and investment research fees.

The goal of this paper is to analyze the effect of these rules on analysts' forecasts. Based on a sample of one-year-ahead earnings per share forecasts for 58 French firms during the period from 1999 to 2011, we conduct panel data regressions. We show that the analysts' optimistic bias declined significantly after CSA rules, which suggests that these rules are effective at curbing the conflicts of interest between brokerage activities and financial research.

Our results are robust to the impact of the Global Settlement and the Market Abuse Directive.

Keywords: Financial analysts, earnings forecasts, conflicts of interest, Commission-sharing agreements

JEL Classification: G17, G24, G28