Analysts give more favorable ratings to stocks held by their firm’s mutual fund clients, according to a new working paper from Harvard Business School.
The paper’s findings:
An analyst’s recommendation on a stock relative to consensus is significantly higher if the stock is held by the mutual fund clients of the analyst’s brokerage firm.
The optimism in analyst recommendations increases with the weight of the stock in a mutual fund client’s portfolio and the commission revenue generated from the mutual fund client. However, this favorable recommendation bias towards a client’s existing portfolio stocks is mitigated if the stock in question is highly visible to other mutual fund investors.
Abnormal stock returns are significantly greater both for the announcement period and in the long run for favorable stock recommendations from analysts not subject to client pressure than for equally favorable recommendations from business-related analysts.
In addition, subsequent to announcements of bad news from the covered firms, analysts are significantly less likely to downgrade a stock held by client mutual funds.
Mutual funds increase their holdings in a stock that receives a favorable recommendation but this impact is significantly reduced if the recommendation comes from analysts subject to client pressure.
The Client is King: Do Mutual Fund Relationships Bias Analyst Recommendations?
In the movie Arbitrage, hedge fund magnate Robert Miller (Richard Gere) justifies his financial and personal chicanery on the grounds that it benefits others (employees, investors, family). This is in the long tradition of Enron, Martha Stewart, Bernie Madoff and many others and now has some academic backing in the form of a new working paper from Harvard Business School.
The paper examines whether individuals cheat more when other individuals can benefit from their cheating (they do) and when the number of beneficiaries of wrongdoing is larger (they do). The results indicate that people use moral flexibility in justifying their self- interested actions when such actions benefit others in addition to the self.
. . . our findings suggest that when others can benefit from one’s dishonesty people consider larger dishonesty as morally acceptable and thus can benefit from their cheating and simultaneously feel less guilty about it.
The authors write that their findings “may have serious implications for the study of collaborative work in the social realm. Self-managed or empowered teams are one of the most prevalent groups in modern corporations. In these teams, decision- making authority is delegated to individual members, who are in charge of making decisions with consequences for their peers and their organization.”
“Our findings suggest that the upside of monitoring and empowerment can be overwhelmed by the downsides of the increased moral flexibility induced by the presence of others. Thus, one implication can be that some members of teams should not be a part of the social circle of the group, and another is the recognition that good people who care about their coworkers can in fact end up cheating more.”
Self-Serving Altruism? When Unethical Actions That Benefit Others Do Not Trigger Guilt by Francesca Gino, Shahar Ayal, Dan Ariely
Growth in the global auto industry in 2013 will be constrained by sluggish demand in Europe and weakening sales in China, says Moody’s Investors Service in its Global Auto Industry Outlook published today. Moody’s outlook for the sector over the next 12-18 months remains stable.
“Although we forecast global light vehicle sales growth of 4.4% in 2012, we have revised our forecast for 2013 demand growth to 2.9% from our January forecast of 4.5%,” says Falk Frey, a Senior Vice President in Moody’s Corporate Finance Group and author of the report. ” Our growth revision is driven by weaker-than-expected demand in Europe and slowing economic pace in China.”
Moody’s forecasts that western European light vehicle demand will contract in 2013 by 3%, compared with its January forecast of 3% growth, because of weaker markets in southern Europe and in Italy especially.
Moody’s has revised lower its forecast for light vehicle demand in China, to 8.5% from its January expectation of 10% growth, in line with Moody’s revised 2013 GDP growth forecast for the country.
Moody’s expects to see more automotive manufacturers taking restructuring action to tackle overcapacity in Europe. However, any restructuring efforts will only be credit positive for European original equipment manufacturers (OEMs) if they reduce their capacities and costs to sustainable levels of demand and this leads to capacity utilisation rates of 90% or higher.
$ Full report: Global Automotive Manufacturers: Sluggish European Demand Continues To Weigh On Global Auto Sales Growth