Effects of regulatory reforms on banking affiliations and conflict of interest

Conflicts of interest arise when analysts use private information shared by affiliated banks to generate biased research reports that mislead investors and cause economic losses to investors. Using the global REIT sample, we find that information flows reduce earnings forecast errors of affiliated analysts by 6.2% and that affiliated analysts issue recommendations that are closer to the consensus on covered REITs after obtaining loans from affiliated banks. The regulatory reforms introduced by the Dodd-Frank Act restrict the information flows but did not adversely affect the US-based affiliated analysts, who continue to produce better forecast outcomes relative to other analysts. In contrast, the reforms caused significant declines in forecast accuracy and wider deviations in recommendations of affiliated analysts outside the US. Information barriers may not necessarily disadvantage affiliated analysts, who can work within the information constraints to improve the quality of research and recommendations and generate welfare gains for the markets.