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Incentives of financial analysts: trading turnover and compensation

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 Incentives of financial analysts:
trading turnover and compensation
Eglė Karmazienė∗
University of Groningen and SHOF

28th May, 2019

Abstract
Are sell-side security analysts paid for turnover-generating research? Using hand-collected
annual income data from tax records in Sweden, I show that analysts’ compensations increase
in the trading turnover that their recommendations generate. Analysts are paid 0.002 per-
cent of broker-trading volume, or approximately 1 percent of broker’s commission revenues. I
find a significant broker-turnover analyst-pay relationship only in the post-global-settlement
period, and the relation is strongest for investment banking clients’ stocks. Additional anal-
yses indicate that the relationship is significant only for the more experienced analysts and
for positive recommendations. These findings empirically validate the previously assumed
turnover-compensation link and may have policy implications related to the Markets in Fi-
nancial Instruments Directive.

JEL: G2, G24.

Keywords: compensation, analyst, turnover, stock recommendation, broker.

∗
Karmazienė, e.karmaziene@rug.nl, is at University of Groningen and Swedish House of Finance. I thank
Jennifer Conrad (the editor), three anonymous referees, Anders Anderson, Anders Bruzelius, Hanna Fromell,
Jon A. Garfinkel, Mariassunta Giannetti, Martin Guri, Patrick Herbst (discussant), Martin Holmén, Harri-
son Hong, Reggy Hooghiemstra, Juozas Karmaza, Robert Lensink, Elias Rantapuska (discussant), Kasper
Roszbach, Bert Scholtens, Rik Sen, Per Strömberg, Milda Tylaitė, Gunther Wuyts (discussant), Alminas
Žaldokas, participants of research events at SIFR, University of Gothenburg, 2nd Annual Lithuanian Con-
ference on Economic Research, Nordic Finance Workshop (Aarhus), for their valuable comments and sugges-
tions. This research did not receive any specific grant from funding agencies in the public, commercial, or
not-for-profit sectors. I am responsible for all remaining errors.
I Introduction

Broker-stock trading turnover increases after the broker releases equity research on the stock
(e.g., Aitken et al., 2001; Irvine, 2004; Mikhail et al., 2007). Brokers earn commissions on
trades, regardless of the ex-post accuracy of their research. If brokers reward the research-
conducting analysts on the basis of induced turnover rather than on the accuracy of a rec-
ommendation, there is a conflict of interest between investors and brokers. The agent (an
analyst) uses their expertise to issue trade-inducing, not just return-predictive, recommen-
dations. The principal (an investor) expects recommendations to be return-predictive. Yet,
the existence of this conflict of interest or the broker-turnover/analyst-compensation link has
not yet been empirically examined due to highly protected personal income and typically
aggregated trading data.
Using a unique combination of datasets in Sweden, I study the extent to which brokerages
compensate sell-side security analysts for trade-inducing equity research. A fully electronic
Stockholm Stock Exchange (SSE) allows me to link each of the sample analyst’s covered
stock-trading turnover with both the broker-firm underwriting relationship and each analyst’s
annual compensation data. The combination of personal income and broker-level trading data
provides a rare setting for examining the relationship between analysts’ pay and turnover.
This paper uses data from the Swedish stock market, which is a sizeable, well-developed
and attractive market for international investors, as many Swedish companies have cross-
listings on foreign stock exchanges. In line with global trends, brokerage houses in Sweden
issue relatively optimistic forecasts, and analysts’ income is significantly higher than the
mean population income.1 To obtain data on labor income and bonus data from the Swedish
Tax Agency, I hand-collect data on 86 analysts’ birth dates and places of residence.2,3 I link
1
Analysts in Sweden issue twice as many recommendations to buy, as opposed to sell, stocks. The higher
frequency of buy recommendations is in line with international practices (e.g., Barber et al., 2001, 2006;
Malmendier and Shanthikumar, 2014).
2
The sample covers 68 percent of analyst-followed companies and brokers, which issue more than 76
percent of the recommendations issued during the sample period (1997 to 2007).
3
In order to comply with Swedish privacy laws, I store an anonymized version of analyst data.

1
this dataset with broker-level trading information (Nasdaq OMX data) and stock returns
(FinBas) around recommendation announcement dates (Thomson Reuters Institutional Bro-
kers Estimate System, I/B/E/S) for firms that were related or unrelated by underwriting ties
with the financial institution (SDC Platinum).
I document a strong relationship between analysts’ compensation and the turnover that
their research generates. On average, an analyst is paid 78,000 Swedish krona (SEK; ap-
proximately USD $10,000 or 28 percent of the Swedish mean gross annual income) more for
research that generates one standard deviation greater, analyst-year-level, annual abnormal
trading turnover for the brokerage house. Additional examination shows that turnover-pay
relationship is significant when analysts issue relatively positive recommendations.4 Past
literature documents that equity research is, on average, optimistic (e.g., Barber et al., 2001,
2006; Malmendier and Shanthikumar, 2014) and that optimistic research is related to higher
trading turnover (e.g. Anderson et al., 2018; Jackson, 2005). My findings are in line with
analysts aiming to release optimistic and trade-enhancing research since brokerage houses
support such behavior. A reward for optimistic research may raise a conflict of interest be-
tween analysts and investors. Analysts may be willing to issue positive recommendations
and benefit from additional turnover and commissions that they generate for the broker even
though investors expect to observe return-predictive recommendations.
Past studies document that financial institutions issue more favorable research on firms
whose stocks they have underwritten (e.g., Dechow et al., 2000; Lin and McNichols, 1998;
Michaely and Womack, 1999). My findings on turnover-compensation relationships are con-
sistent with literature linking bias in research with the investment-banking affiliation. I show
that the two relationships not only co-exist, but also vary over time with the importance of
trading commissions in the total revenues of the research department. In 2003, the Global
Analyst Research Settlement (GARS) restricted funding research departments with revenues
from an underwriting business. This restriction potentially increased the importance of trad-
4
Appendix ?? summarizes why analysts are inclined to issue overly optimistic, rather than overly pes-
simistic research.

2
ing commission revenues for the research departments. In line with expectations, my findings
indicate that the turnover-pay link was insignificant in the pre-GARS sample period, but
became significant after GARS. I also use this change in a regulation to evaluate the link be-
tween turnover and income across existing and nonexistent investment-banking relationships.
I document that the turnover-pay relationship is strongest when analysts’ research induces
trading in investment banking clients’ stocks, especially when direct compensation for col-
laborating with an investment-banking department is restricted. This result is consistent
with brokers indirectly compensating analysts for covering affiliated stocks after the direct
compensation was restricted. This indirect payment rises from trading turnover generated
at the brokerage level, and the commissions related to it.
Furthermore, my results suggest that experienced analysts are more likely to be com-
pensated for increasing brokers’ commission revenues. Equipped with three different proxies
for job practice (experience, age, income), and using sample splits, I show that the pay
structure is asymmetrical between experienced and inexperienced analysts. The turnover-
compensation link is positive and significant among experienced analysts. The structure of
these specialists’ compensation packages may encourage them to promote their research. Ex-
perienced employees, whose research increases the brokers’ analyst-year-level trading turnover
by one standard deviation, can receive between a SEK 129,250 (USD 16,600) and SEK 268,840
(USD 34,500 or 112 percent of the sample period’s average national personal gross income)
greater reward. This finding may help explain why experienced analysts are more likely to
issue bold research (Clement and Tse, 2005; Hong et al., 2000). Firstly, experienced ana-
lysts are less likely to be terminated if their bold research appears to be inaccurate (Hong
et al., 2000). Secondly, my results show that they are also more likely to be compensated
for trade-generating research, and bold research is more likely to generate trade (e.g. Irvine,
2004).
This paper contributes to literature on influential equity research. Hayes’ theoretical
model (1998) shows that trade-generating incentives can explain relative optimism in ana-

3
lyst forecasts, assuming that analyst income increases with broker turnover. More recent
studies have empirically demonstrated that issuing a recommendation increases trading in
a recommended stock (Anderson et al., 2018; Irvine, 2004; Jackson, 2005; Mikhail et al.,
2007). Recommendations that do not follow the consensus (Irvine, 2004) or are issued by
optimistic analysts (Jackson, 2005) increase turnover even more. Optimistic analysts can
raise investors’ interest, encourage them to buy the stock, and earn commissions from each
transaction for the brokerage house. Hayes’ (1998) and later studies are built on the assump-
tion that analyst income increases with broker turnover and commissions, which my findings
empirically validate.
This study also relates to the literature on pay in the financial services industry. Financial
firms compensate their employees three times more for talent than do firms in other industries
(Célérier and Vallée, 2016). Research departments split the assigned compensation pool
based on multiple determinants. Using data mostly from a single broker, Groysberg et
al. (2011) show that recognition, portfolio size, and covering stocks of investment-banking
clients explain a large part of the variation in analysts’ income. Using multiple brokers’ data,
I directly examine the relationship between analysts’ compensation, trade generation, and
trade generation in investment-banking client stocks.
Other literature on analyst pay mainly includes surveys, interviews of former analysts,
and several stories of well-known outliers (e.g., Brown et al., 2015; Irvine, 2001; Laderman,
1998). Due to limited, highly regulated access to pay data, findings about incentives faced by
analysts are mainly based on assumptions, rather than on evidence. My results complement
those of Ibert et al. (2018), who examine the income of mutual-fund managers in Sweden.
Their paper shows that managers’ pay is based more on the volume of fees they collect for the
institution than on the fund’s performance. I document that analysts’ pay is based on the
volume of commissions their recommendations generate for the brokerage house. In a broader
sense, by showing that analysts are compensated for gathering, processing and efficiently
releasing information to the inefficient markets, I also add to Grossman and Stiglitz (1980)

4
and Gârleanu and Pedersen (2018).

II Hypotheses

II.A Trading turnover and analyst compensation

Three relationships are needed to empirically establish a positive link between brokerage
trading turnover and analyst compensation. First, there must be a link between analyst cov-
erage and brokerage-trading volume. Second, brokers should appreciate analysts’ ability to
induce stock trading. Third, financial institutions should occasionally reward their employees
for exceptional performance. Rewards help align analysts’ and brokerages’ incentives.
In light of the first relationship, past literature is consistent with trading turnover in stock
s via broker b increasing after an analyst working for the broker b issues a recommendation
on a stock s (e.g., Anderson et al., 2018, Irvine, 2004, Jackson, 2005). A recommendation
that does not follow consensus (Irvine, 2004), or is issued by an optimistic analyst, further
increases trading turnover (Jackson, 2005). Hayes’ theoretical model (1998) shows that an
analyst interested in maximizing this turnover is likely to release trade-inducing information
about the firm.
Turning to the second relationship, brokers favor high turnover, as each trade generates
commissions to the transacting broker. During my sample period, brokers collected on aver-
age six cents per share in the Canadian stock markets (Irvine, 2001) and 15 basis points in the
Australian equity markets (Jackson, 2005). Interviewed analysts revealed that, depending
on a client brokerages in Sweden charged between five and 50 basis points of a transaction
value, with a modal value of 20 basis points (Anderson et al., 2018).
When looking at the third relationship, there is substantial evidence that financial insti-
tutions tend to reward their employees for favorable past performance. The analyst compen-
sation at Groysberg et al. (2011) examined brokerage house increases in factors contributing
to brokerage’s revenues, e.g. trading commissions and corporate finance fees. As the median

5
real salaries remain relatively stable over the time, the variation in level and skewness total
compensation across analysts and over time is primarily driven by bonus rewards. Over the
analyzed 1990-2005 period, this average fraction of bonus in total compensation varied from
46 to 84 percent. The ratio of analyst compensation at the 90th and 10th percentile varied
between 2.6 and 6.1, indicating a skewed distribution.
These three links suggest that the trade channel should explain at least part of analysts’
compensation.5 I start the empirical analysis by testing the following hypothesis.

Hypothesis 1: Analyst compensation increases in trading turnover generated with analysts’

research and transacted via their brokerage houses.

II.B Predictive power of recommendations

Investors take analysts’ forecasts into account when trading. They want to observe return-
predictive recommendations. Yet analysts facing conflicts of interest may not issue entire,
relevant and precise information about the stock (Hayes, 1995). The evidence of analysts’
intentions to issue biased, attention-grabbing, trade-inducing research is mixed. On one
hand, analysts may seek to be optimistic since optimistic analysts generate higher trading
turnover (Jackson, 2005). If the turnover-compensation link is positive, analysts may seek
to issue biased recommendations to generate more trading and more income.
On the other hand, analysts may aim to issue return-predictive recommendations. Past
studies show that analysts and brokers want to build a good reputation (e.g., Hong and
Kubik, 2003). Analysts build a good reputation by becoming accurate forecasters (e.g.,
Stickel, 1990) and avoiding inaccurate research (e.g., Groysberg et al., 2011).6 As brokers
increase their prestige by employing analysts who provide accurate research (Groysberg et
5
The anecdotal evidence from Irvine (2001) and my interviews supports the prediction. Analysts admit
that their bonuses are substantial and tied to their performance. They do not received a fixed share of
commissions, but this relationship does exist.
6
Interviewed Swedish analysts also implied the existence of dual standards. One of them admitted that
“recommendations are biased.” Another one stressed the importance of being able to predict the returns.
“You always have to be accurate. If you are doing something other than (what) you are saying, then nobody
listens to you.”

6
al., 2011; Hong and Kubik, 2003), they may seek to align brokers’ and analysts’ incentives
by compensating for return-predictive research only.
I examine if brokerage house compensation structures encourage analysts to issue return-
predictive recommendations. To be specific, by comparing compensation for trading turnover
generated with return-predictive (predictive), overvaluing (positive) and undervaluing (neg-
ative) research, I test the following hypothesis.

Hypothesis 2: Analyst compensation increases in trading turnover surrounding predictive

recommendations only.

II.C Research and other departments

A positive turnover-pay relationship is in line with a broker encouraging an analyst to en-

hance trading. I expect such encouragement to increase with the importance of the trading
commission revenues for the research department. A research department funded by other
sources may motivate trade-generating research less frequently than a research department
funded solely by revenues from trading commissions.
Full-service investment banks used to fund research departments with the revenues from
their investment-banking departments (Cowen et al., 2006).7 In 2003, US regulators re-
quested 10 influential financial institutions to separate their research departments from other
departments. This change decreased the revenues from other departments, but increased
the importance of trading commissions. The regulation provides a suitable setting to test
whether brokerages align analyst income with commission revenues, depending on the sources
of the brokers’ income.
Previous literature shows that brokerages also face other incentive problems related to
stock-trading turnover. They are more likely to leak information about upcoming research
to their privileged clients than to other clients in return for trading via their brokerage house
7
Analysts used to help their institutions in many ways. As one interviewed Swedish analyst concluded
that “you should view an analyst as someone who holds the door for the bank... he speaks with the CFO at
least couple times a year, and he could promote the bank’s products - loans, currency hedging...”

7
(Anderson et al., 2018; Nefedova, 2017). Using the same framework Nefedova (2017) shows
the tipping practice intensifies after the GARS period.
Even though GARS applies to only a few brokerages, I examine if it affects brokerages
on average.

Hypothesis 3: The turnover-pay relationship increases with the importance of trading

commissions in research-department revenues.
Brokerages may have special relationships with some firms that they cover. For example,
when a full-service investment bank underwrites a firm’s security offering, the firm becomes
closer, not only to the financial institution, but also to its research department. Analysts
issue more optimistic research on these affiliated firms, and this optimistic bias increases in
underwriting fees paid to the bank (e.g., Dechow et al., 2000; Michaely and Womack, 1999).
The recommendations issued to brokers’ past investment banking clients are overly-
optimistic at least for two reasons (Lin and McNichols, 1998; Michaely and Womack, 1999).
First, negative information tends to be suppressed. Analysts admit that bankers “repeat-
edly pressured them to alter negative research reports on the stocks of the firm’s corporate
clients - particularly those for which it did stock underwriting deals” (Lin and McNichols,
1998; Michaely and Womack, 1999). Second, positive information about the clients tends to
be exaggerated. Favorable coverage helps brokers market underwritten stocks and increase
their liquidity (Groysberg et al., 2011; Krigman et al., 2001). These findings are in line
with brokers encouraging analysts to treat the firms with which the broker had an under-
writing relationship differently to other firms. They are also consistent with evidence from
analyst interviews. Wall Street analysts admit that they are never actively encouraged “to
do objective, critical research” or to “protect their non-investment banking clients’ interests”
(Morgenson, 2002). This bias is so predictable that investors knowingly de-bias the affiliated
forecasts (e.g., Lin and McNichols, 1998; Michaely and Womack, 1999; Mikhail et al., 2007).
I extend the question of analysts’ conflict of interest by examining whether analysts also
face different incentives to encourage the trading of affiliated and other stocks. In a case

8
of a positive turnover-pay relationship, I test whether this relationship is stronger when an
analyst covers affiliated stocks.

Hypothesis 4: Even when the research department is separated, the turnover-pay relation-
ship is stronger when an analyst covers affiliated stocks.

III Swedish setting

Examining the relationship between trading turnover and analyst compensation relies on
incentives and compensation systems established in the industry of financial services. If
these practices vary across countries then this relationship evaluated in one country cannot
be fitted in the other country. This section compares the Swedish and international markets
of equity research to provide support for the external validity of the results.
The Swedish market provides an excellent setting to evaluate the relationship between
trade-generation and analyst compensation. The processes in the industry of sell-side equity
research, the trends in recommendations (Subsection III.A, Appendix B), investors’ response
to the recommendations (Subsection III.B) and evaluation of the researchers (Subsection
III.C) are in line with the practices in the other European countries, U.S., Canada, Aus-
tralia. These similarities provide support that the results established in this paper may be
generalizable to other developed markets. Yet, several market-specific characteristics de-
scribed at the end of Subsection III.A provide arguments, why this generalizability should
be handled with caution. Stock market participation in Sweden is higher than in most of
the other European countries, but similar to the levels in the U.K. and the U.S. But since
the Swedish analyst community is relatively small and reputation concerns are likely to be
stronger there, the trade-generation effects are likely to be stronger in the American and
British markets.

9
III.A The market

This paper examines data from Sweden. SSE is a well-developed stock market with several
characteristics, which make it a suitable environment to examine a turnover-pay relationship.
First, the Stockholm Stock Exchange (SSE) is a sizeable market. At the end of 2006, just
before it became a member of Nasdaq, 417 companies were listed on SSE. Their total market
capitalization was USD $438 billion, making Sweden the 12th largest stock market in the
world (Anderson et al., 2018).
Second, SSE is fully electronic. Brokers execute clients’ trades directly, not via dealers
or specialists (Anderson et al., 2018). Such a system allows me to link brokers with their
trading turnover in each stock.
Third, analysts’ optimism reflects global trends. In line with evidence from other coun-
tries, analysts in Sweden tend to issue more buy than hold or sell recommendations (e.g.,
Barber et al., 2001, 2006; Malmendier and Shanthikumar, 2014). On average, analysts rec-
ommend purchasing stocks twice as often as placing them.
Fourth, in line with past literature, the variation in composition of issued stock recom-
mendations is lower than in stock returns. The share of buys and sells narrowly fluctuates
around the mean. The variation in the Stockholm stock market index is more pronounced
(Figure 1).
Fifth, many Swedish companies have cross-listings on foreign stock exchanges, which
makes the market attractive to international investors.
The Swedish financial sector is organized similarly to the financial sectors of other de-
veloped countries. The size of the Swedish financial market relative to its own economy is
similar to its US counterpart. For example, the ratio of the financial market’s capitalization
to GDP was 93 percent in Sweden, and 107 percent in the US (World Bank, 2012). Multiple
analysts cover SSE stocks, especially the most traded ones. In 2017, 45 unique analysts issued
recommendations on the most widely covered AstraZeneca stock, a constituent of the main
SSE index, OMXS30. Similar to the Canadian stock market, the effect of a recommendation

10
announcement on trading turnover lasts for two weeks (Anderson et al., 2018; Irvine, 2004).
To the best of my knowledge, there is only one study evaluating the predictive ability
of Swedish analysts (Personne and Pääjärvi, 2013). Similar to that of US analysts, Swedish
analysts’ forecasting accuracy is superior to the accuracy of time-series models (e.g., Brad-
shaw, 2011; Personne and Pääjärvi, 2013), which supports the notion that equity research
has value. Analysts revealing information with the issue of recommendations implies that
not all information is incorporated into stock prices prior to this revelation, and that the
efficiency of the Swedish market is limited. The agency conflicts as well as the motives to
increase trading turnover and turnover-pay sensitivity are expected to be higher in more
efficient markets.
This paper examines the 1997 to 2007 time period. The brokerage industry was compet-
itive, with 50 brokers active in 1997. This number increased to 70 in 2006, and brokerage
industry concentration decreased. The share of trading volume of the 10 most active brokers
declined from 73 percent to 58 percent (Anderson et al., 2018).
There are several characteristics making the Swedish market different from other mar-
kets. First, the Swedish sell-side analyst community is relatively small. According to one
interviewed analyst, who has over 30 years of experience working with equity markets in
Sweden, Stockholm community is comprised of approximately 100 sell-side equity analysts.
This number is lower in Sweden than in the US. Over the first four months of 2018, 2095
analysts issued recommendations on American stocks (I/B/E/S). Assuming that analysts
tend to cover stocks of the country of their residence, this measure is in line with the notion
that the US analyst market is at least 20 times larger than the Swedish one. Preserving a
good reputation and willingness to issue a return-predictive recommendation may be more
important in a relatively small market. Second, stock-market participation is high among
Swedish households. Similar to the US and the UK markets, about a half the population
directly or indirectly owns stocks (Guiso et al., 2003). Stock-market participation in Sweden
is significantly higher than in the Netherlands, Italy, France, and Germany (15 percent to 25

11
percent). Third, before SSE became a member of NASDAQ, its annual trading turnover was
about 86 percent of its market capitalization (OECD database). This measure of market ac-
tivity was significantly lower than in the US (132 percent) or German (119 percent) markets,
but comparable to other large, European stock markets (Norway and France, 73 percent; the
average of the European Union (EU), 81 percent; Switzerland, 85 percent; the Netherlands,
88 percent).

III.B Research and trading

Clients do not directly pay brokerage houses for their research products.8 They indirectly
pay for this advice with trading commissions. However, institutional investors may also not
pay for observing a specific recommendation by not trading the recommended stock via the
recommending brokerage house.
Compensation for research products commonly uses the following practice. Institutional
investors privately rank brokerage houses by the value their research products create. The
better-ranked brokerages subsequently receive a higher volume of trades and collect a larger
pool of commissions. This is a common practice in Sweden (interviewed Swedish analysts),
the US (Groysberg et al., 2011), Canada (Irvine, 2001), and Germany (an interviewed German
analyst). The interviewed Swedish analysts revealed that institutional investors are relatively
open about their analyst and brokerage-house rankings. These investors even allow brokerage
houses to see their positions in these rankings.
Institutional investors subsequently send most of their orders based on these rankings.
They are not likely to switch brokers from order to order. Similar to Canada (Irvine, 2001),
Germany (an interviewed practitioner) or Australia (Jackson, 2005), investors switch orders
among brokers less frequently, usually quarterly. This infrequent change of orders may impose
difficulties, relating brokerage-trading volume to analyst actions or pay. Yet, Jackson (2005)
shows, and my study seconds, that a strong link exists.
8
Starting in 2018, MiFID II regulation demanded direct payment for research advice in 31 European
countries, including Sweden.

12
III.C Brokerages

According to the two interviewed heads of research departments, analysts in Sweden have
the same career tracks as analysts in other developed countries. Poorly performing analysts
leave the industry. Similar to the US, well-performing analysts are more likely to be pro-
moted (Hong and Kubik, 2003) to become senior analysts, heads of research departments, or
fund managers. The way in which the brokerage house evaluates an analyst is related to the
way the analyst is evaluated by institutional investors. The head of the research department
talks with the clients and realizes how they like working with specific employees. According
to the interviewed analysts, institutional investors take into account not only analyst rec-
ommendations, but also their underlying research reports and assumptions. They use these
assumptions in their own equity evaluations. Analysts who have insights facilitating buyers’
own equity research are more likely to be evaluated positively.
Institutional investors, who are the main recipients of analysts’ studies, rank brokerage
houses by the quality of research, insights, and value created for the client. The better-ranked
analysts are more likely to become fund managers or be promoted to senior analysts or heads
of the research divisions.
Well-evaluated analysts are not only more likely to experience favorable job separations,
but they are also more likely to receive an annual bonus. These bonuses constitute a large
part of analysts’ total income in the US (Groysberg et al., 2011). An article in the Wall
Street Journal (2009) suggests that top analysts can earn bonuses that are 10 times higher
than their fixed salary. A bonus of this amount is also not unheard of in Sweden. Such large
bonuses are more likely to be paid by boutique brokerage companies. Interviewed Swedish
analysts revealed that well-performing analysts normally receive bonuses several times larger
than their annual salaries. Similarly to the US practice, the worse performing or first-year
analysts receive bonuses lower than their annual salaries.
The likelihood of staying in business is similar for my sample analysts and for US an-
alysts. The probability that a currently active analyst issues at least one recommendation

13
the following year is 77 percent in my sample of 86 analysts and 75 percent in the sample of
analysts covering US stocks (a proxy for the US analysts) over 1997-2007 year period.

IV Data and descriptive statistics

IV.A Data

I use several data sources in the empirical part of this paper. First, I use Thomson Reuters
I/B/E/S recommendation data. Second, I use daily, broker stock-level, trading data provided
by Nasdaq OMX. Third, to supplement these sources, I collect analysts’ dates of birth, which
facilitate obtaining their income data. I describe the data-gathering method in Appendix A.
Fourth, I obtain annual personal income data from Swedish Tax Agency. Fifth, I use the
SDC Platinum database to gather underwriting relationships between brokers and publicly
listed Swedish companies. Sixth, I obtain high-quality data on stock returns from FinBas to
measure predictability of recommendations.

IV.B Variable definitions

This paper examines the relationship between analysts’ compensation and the stock-trading
turnover their research generates. I define trading around the day of the recommendation
announcement as follows:

Rit
X d=10
X d=−10
X
AT urnoverit = 16 ∗ ( turnoverrdis /16 − turnoverrdis /11) (1)
r=1 d=−5 d=−20

in which turnoverrdis is a trading volume in stock s in SEK, on the day d via a brokerage
house of an analyst i, who issues a recommendation r on a stock s. An analyst i issues a
total of Rit recommendations in year t. For each analyst-year, I add up the trading turnover
surrounding each of these recommendation-announcement days and define AT urnover as a
cumulative abnormal turnover. The estimation window is from 20 to 10 trading days before

14
the announcement day.
The event window lasts for 16 days. It starts five trading days before the recommendation
announcement and finishes 10 trading days after it. There are several reasons to choose a
wide recommendation window. First, the commercial databases sometimes imprecisely record
the recommendation date (e.g., Hoechle et al., 2015). Widening the event window increases
the likelihood of capturing the correct day. Second, I choose the start of the event period
before the recommendation date to account for tipping or informing privileged clients about
upcoming equity research. Regulations in Sweden do not require recommendations to be dis-
closed to all customers simultaneously. The Swedish Securities Dealers Association (SSDA)
only forbids analysts, not clients, from trading stocks before the release of a recommendation
(since July 2002). In line with US brokerage firms (e.g. Christophe et al., 2010; Nefedova,
2017), Swedish firms gradually release equity analyses to the market.9 Market participants
react to the news by increasing trading one week prior to the recommendation announcement
date (Anderson et al., 2018; Nefedova, 2017). An interviewed Swedish analyst admitted to
such behavior. According to him, although analysts do not actively seek to release infor-
mation about upcoming research, they sometimes unintentionally reveal information during
conversations with clients.10 Third, the end of the recommendation window is 10 trading
days after its actual release. This is in line with the past studies showing that forecasts,
which differ from the consensus, generate significantly more broker trading from one week
before, to up to two weeks after the release date (Irvine, 2004; Irvine et al., 2006).

IV.C Descriptive statistics

The sample data reflects several global trends. First, the average level of sample recommen-
dations is:
9
Please refer to Nefedova (2017) for a detailed summary of other studies examining tipping practices.
10
One interviewed analyst revealed that he had frequent communication, up to several times per week,
with his clients. “I would call him (a client) and say I listened into (firm’s) report yesterday... mmm... it
seems that it is not good any longer... And then he would understand that I am getting a bit concerned
about the recommendation even though I don’t tell him (that) directly.”

15
 • similar to the recommendations on international stocks in non-US G7 countries’ stocks
over the 1993-2002 year period (Jagadeesh and Kim, 2006);

• similar to the recommendations on international and US stocks in the 2003-2007 year

period (Appendix B);

• different from the recommendations on US stocks in the 1997-2002 year period (Ap-
pendix B).

A large part of the prior literature examines the output of the U.S. sell-side equity analysts.
The above-defined patterns show that this output is on average more positively biased in
the U.S. than in Sweden. The volume-generation incentive is potentially stronger in the U.S.
Based on this reasoning, the results of this paper are likely to hold in other countries and be
more substantial in the U.S.
Second, In line with Groysberg et al. (2011), I show that analyst income is much higher
than the average personal income. Figure 2 suggests that the 10th percentile of sample ana-
lysts’ income is well above the mean Swedish salary. Moreover, analyst income distribution is
lopsided. Although the sample income average (SEK 1.86 million) and median income (SEK
1.53 million) are similar, the minimum (SEK 0.14 million) is much closer to the median than
is the sample maximum (SEK 13.91 million) (Table 1).
Third, in line with Groysberg et al. (2011) I show that analyst income skewness varies
over time and is similar to the level in the U.S. I evaluate income skewness using a ratio of
analyst compensation at the 90th and 10th percentile. The annual income skewness ranges
from 2.6 to 6.8 in my sample and from 2.6 to 6.1 in Groysberg’s et al. (2011) sample of
analysts working for a single brokerage house.
My sample includes 20 brokerage firms and 126 broker-analyst pairs. 50 and 80 percent
of the sample analyst-brokerage pairs correspond to one of the five and 10 largest brokers,
respectively. Uneven analyst employment across brokerage houses is in line with uneven size
distribution across brokerages in Sweden (Anderson et al., 2018).

16
 Four Swedish financial institutions dominate my sample of 20 brokerages. 63 percent of
analyst-year level observations are related to these financial institutions. The other six top-10
brokerage firms correspond to 26 percent of observations and are international, including one
Dutch, one Icelandic, one Danish, one US firm, and two Swedish firms. Although Swedish
financial institutions constitute a large part of the sample and the market, they are not
unique employers. Analysts can also work for a foreign institution and cover Swedish firms
while located in Sweden.
My sample covers 380 analyst-year observations. Over an 11-year period (1997 to 2007),
86 analysts issue 2,717 equity recommendations on 230 listed firms. Table 1 presents descrip-
tive statistics for the sample. The mean (median) analyst issues 7.15 (6) recommendations
per year, 18 percent of these recommendations cover underwriting-affiliated firms. The mean
(median) analyst is 35 (34) years old, has five (four) years of experience issuing equity rec-
ommendations, and follows four (four) firms.
The average recommending broker’s daily stock-trading volume is approximately SEK
25.2 million in the period before the recommendation announcement day. This measure
increases to SEK 35.6 (30.9) million in the short (long) event window.11 The recommending
broker experiences a stronger effect on its trades than the other brokers after its analyst
releases a recommendation. The average stock-trading increase is SEK 10.4 (5.7) for a broker
who issues research and SEK 4.6 (1.5) million for an average broker that does not issue
a recommendation on that stock. T-test statistics suggest that both - the difference in
trading before and after the recommendation announcement day, and turnover levels between
recommending brokers and other brokers - are statistically significant (Table 2).
11
I define short and long event windows within [-1,1] and [-5,10] days around the issue of a recommendation.

17
V Income and trading volume

V.A Empirical design

In the main analysis, I examine if analysts’ income increases, depending on the amount of
trading volume that their recommendations generate. My empirical strategy uses multiple
recommendations that an equity analyst issues per year. I use first-differencing transfor-
mation of the OLS estimation for several reasons. First, it eliminates unit root from the
dependent variable of annual income. Second, it controls for non-time-varying unobserved
heterogeneity across analysts. I do not observe any analyst-specific characteristics (such as
ability or education) that could affect their income. Third, this transformation mitigates the
outliers and decreases the skewness of the income distribution from 3.57 to 0.17. I use the
following regression:

Incomei,t − Incomei,t−1 = α + β(AT urnoveri,t − AT urnoveri,t−1 ) + Xi,t δ + i,t (2)

in which Incomeit is the annual income of analyst i in year t in thousands SEK. As defined
in the previous section in more detail, AT urnoveri,t is a cumulative abnormal turnover that
an analyst’s i research generates in year t. Xi,t is a vector of analyst-year level controls.
Following previous studies, I control for the number of recommendations an analyst i issues
over year t; the number of firms (Clement, 1999; Jacob et al., 1999); and (3) the value of
these firms covered (Groysberg et al., 2011). I use the first difference transformations of the
variables. As analysts’ compensation and variance therein fluctuates with market conditions
(Groysberg et al., 2011), I limit the concerns regarding the trends in analyst compensation
by augmenting the regression (2) with year-fixed effects. i,t is the error term.
The pair-wise correlations among the three explanatory variables (number of recommen-
dations, number and value of firms covered) are positive and significant at the 1 percent

18
level.12 Following Jackson (2005), I use a variance inflation factor to examine the potential
problem of multi-collinearity. According to standard practice, a factor greater than 10 indi-
cates a problem of multi-collinearity in the regressions. The largest variance-inflation factor
of 2.93 is on the variable measuring the number of recommendations issued, indicating that
multi-collinearity does not affect the results of the study.
In regression (2), my coefficient of interest is β. A positive, significant coefficient is in
line with brokers paying analysts for generated trading volume.

V.B Results

Equity analysts receive a higher pay when their recommendations generate abnormal levels of
trading. The estimated level of abnormal turnover is positive and significant (Table 3, Column
1). The elasticity of compensation to abnormal turnover is 0.00002. An equity analyst whose
research induces investors to trade 1 million SEK more is compensated with 20 SEK. This
result supports the notion that analysts’ annual income is related to trading volume that
their research generates. The relationship helps align analyst and broker incentives. Broker
income increases in trading volume and commissions, while analyst income increases in the
trading volume that recommendations generate for a broker. Using Anderson et al. (2018)
reported modal level of commissions in Sweden (20 basis points), I perform rough calculations
to evaluate the economic significance of my estimates.
One standard-deviation (SEK 3.9 billion) increase in an analyst-year level abnormal
turnover is related to SEK 7.8 million-higher broker commissions and SEK 78,000 (USD
10,000)-higher analyst annual pay.13 These calculations are in line with analysts receiving
one percent of the commissions that their research generates for brokerage houses.14 The
12
The correlations between the first differences of the number of recommendations and the number of firms,
the number of recommendations and the value of the portfolio, and the number of firms and the value of the
portfolio are 0.78, 0.39, and 0.25 respectively.
13
An interviewed Swedish analyst revealed that “recommendations create commissions and commissions...
we live on”.
14
Irvine (2001) reports that a research department at a Canadian brokerage house received 10 percent of
the gross commissions. If the same situation occurred in Sweden, an analyst would receive one-tenth of the
amount assigned to the research department.

19
SEK 78,000 compensation increase is equal to 28 percent of the sample period’s average,
gross Swedish annual income, or over five percent of the sample median income. The largest
sample cumulative abnormal turnover generated in a year (15.2 billion SEK) is related to a
compensation increase of SEK 304,000 (USD 39,100), which is 118 percent of the average
personal income in Sweden that year (2007).
Next, I use back-of-the-envelope calculations to evaluate the economic effects. An analyst
working for a large Swedish financial institution, Swedbank, changed a recommendation for
Ericsson stock from hold to buy in 2002. The positive news raised daily broker’s trading
turnover from an average of 116 million SEK in the estimation period to 333 million SEK
in the event period. According to the estimates, an analyst could expect a SEK 70,000
(about USD $9,000) reward for such an influential recommendation, leading to a cumulative
abnormal broker’s turnover of SEK 3.5 billion. Another analyst working for a large Swedish
financial institution, Handelsbanken, renewed a recommendation to buy Volvo shares in 2007.
The update alone, without a change in recommendation, increased the trading turnover via
this broker by SEK 1.2 billion during the event period. According to the estimates, it should
have led to a SEK 24,000 (about USD $3,000) increase in analyst income.

VI Predictability of recommendations

Not only accurate, but also optimistic analysts generate more trade (Jackson, 2005). The
latter face a conflict of interest between generating a short-term trade with positively-biased
research, and building a reputation with accurate, long-term research. In this section, I
use a cross-sectional variation of recommendations to test whether compensation from the
brokerage house supports the decision to accurately predict.

20
VI.A Variable definitions

I divide the sample recommendations into three groups: predictive, positive, and negative.
Predictive recommendations are able to estimate the stock’s return relatively well. Positive
and negative recommendations estimate stock returns too optimistically and too pessimisti-
cally, respectively, relative to how the stocks actually perform, in absolute terms or in relation
to other stocks on SSE. Table 4 defines the three types of recommendations.
Predictive recommendations are the most frequent. Predictive, positive, and negative
analyses constitute 47 percent, 42 percent and 11 percent of the sample. An analyst issues,
on average, 3.3 predictive, 2.9 positive and 0.8 negative recommendations per year. The
fraction of predictive recommendations among all sample recommendations remains relatively
stable over time. Yet, the predictive recommendations are related to the lowest trading
levels. The mean values of cumulative abnormal trading turnover around the [-5, 10]-day
recommendation announcement date are SEK 103, 81, and 68 million for positive, negative
and predictive recommendations, respectively. Several explanations support this ranking.
First, analysts’ optimism is somewhat driven by trading incentives (e.g. Cowen et al., 2006).
Second, traders respond less to sell than to buy recommendations (Irvine, 2004). Third,
anecdotal evidence from interviews with the practitioners confirms their willingness to issue
bold research.15

VI.B Results

I examine the turnover-pay relationship, depending on a type of recommendation that gener-

ates this trading volume. I split the variable AT urnover to an abnormal turnover rising from
each recommendation type. In particular, I create three variables, AT urnover P redictive,
AT urnover P ositive, AT urnover N egative, defining analyst-year level broker’s abnormal
trading turnover surrounding the issues of recommendations that are predictive, positive, or
15
An interviewed Swedish analyst revealed that “we like to have a lot of sell, a lot of buy (recommendations),
no neutrals, really... We would like to have strong opinions to help (traders) to make up their minds.”

21
negative, respectively. I create these variables for each period of comparison: one, six and 12
month(s). I replace AT urnover in regression (2) with these three variables.
The estimates suggest that the turnover-pay relationship is significant only when the
research is relatively optimistic. The estimate on the variable AT urnover P ositive, 0.022, is
positive and significant (Table 5, Column 1). The results hold when evaluating the predictive
power of a recommendation over one, six or 12 month(s) (Table 5, Columns 1-3).
My results are in line with brokerage houses encouraging positive research. Such a com-
pensation system may motivate analysts to issue investor-deceiving research. Institutional
investors know that analysts are, on average, optimistic and can de-bias their recommen-
dations (e.g., Malmendier and Shanthikumar, 2007). Kent Womack even states: “just as
consumers know to be somewhat skeptical of the commercials they see on television, profes-
sional investors know how to de-bias information they receive from analysts.”16 Yet, investors
cannot de-bias expectedly optimistic forecasts to their full extent (Lin and McNichols, 1998;
Michaely and Womack, 1999), which opens up room for regulation.
For robustness tests, I adjust the regression by including the three turnover variables one
at a time. Regressions with a single variable that measures turnover rising from predictive,
positive, or negative recommendations provide results that are in line with previous findings.
The coefficients on ATurnover that originate from predictive and negative recommendations
remain not significant (Table 5, Columns 4 and 6). The coefficient on turnover rising from
positive recommendations is significant. It decreases from 0.022 to 0.014 (Table 5, Column
5), but this change is not statistically significant.
As an additional test, I show that my findings also hold when recommendations are
defined on a three-point scale, which became more common among the US analysts in the
second half of my sample period. The result of this test is in line with a notion that trading
turnover in optimistically evaluated stocks is a robust predictor of analyst pay.
16
This quote is taken from Jackson (2005), since the original source of the quote, on the University of
Pennsylvania website, has been removed.

22
VII Research and other departments

VII.A Methodology

This section examines if turnover-income sensitivity changes over time. The Global Analyst
Research Settlement (GARS), reached in April 2003, provides a suitable setting to evaluate
this variation. Before GARS, analysts could benefit from issuing favorable recommenda-
tions to related firms. To limit such practices and to reduce bias in the equity research of
investment-banking clients, regulators passed two rules. On May 10, 2002, SEC issued NASD
Rule 2711 (Rule) to prevent investment bankers from pressuring analysts to issue favorable
reports for underwriting clients. The rule had to be implemented by Nov. 10, 2002. More
important for this study, regulators appointed 10 influential financial institutions in April
2003 to separate research departments from other departments (GARS) in order to mitigate
numerous conflicts of interest that arose between the departments among Wall Street firms.17
This change restricted research departments’ ability to receive revenues directly from invest-
ment banking departments. A clear separation between research and investment banking
business limits analysts’ direct compensation for covering employers’ underwritten stocks.
First, I test if analysts are compensated more for trade-generating research after GARS
than they were before. Using sample splits, I expect that the coefficient on AT urnover
increases with the increase in the importance of commission revenues for the research de-
partment. Second, I test to see if analysts are rewarded for doing research differently for
investment-banking clients than for the other clients. I examine if analysts’ compensation
packages are structured in a way that aligns underwriting institutions’ incentives with ana-
lysts’ incentives. I test if analysts are compensated more for abnormal turnover generated
for affiliated firms, than for the other firms.
I split the turnover variable into two variables. AT urnover U nderwriting reflects abnor-
17
The 10 firms that signed GARS were Bear Stearns & Co. LLC, Credit Suisse First Boston Corp.,
Deutsche Bank Goldman Sachs, J.P. Morgan Chase & Co., Lehman Brothers Inc., Merrill Lynch & Co. Inc.,
Morgan Stanley, Salomon Smith Barney Inc., and UBS Warburg LLC.

23
mal turnover, rising from trading stocks of a broker’s investment-banking clients. I define
that a broker is affiliated with a firm, if it is the lead underwriter at a security offering during
the current year or the last three years (Jackson, 2005). AT urnover N onU nderwriting is an
abnormal turnover, rising from trading in all other stocks. I replace AT urnover in regression
(2) with these two variables.
I examine whether analysts are compensated differently if their recommendations gen-
erate trade on affiliated and on unaffiliated stocks. But analysts may actually be compen-
sated for issuing positive recommendations for the clients of their employer’s underwrit-
ing business. These recommendations may just happen to raise trading volume. To ad-
dress this concern, I augment the regression (2) with variables defining the average level of
analyst-year recommendations on all stocks (M eanRec) and on stocks of underwriting clients
(M eanRec U nderwriting).

VII.B Results

My estimates reflect the spirit of GARS. The coefficient on AT urnover is insignificant before
2003, but positive and significant in the later period (Table 6, Columns 1 and 2). This result
is in line with the turnover being a determinant of analyst compensation in the post-GARS
sample period. Brokerages structure compensation to ensure analysts also seek to enhance the
trade, especially when the weight of commissions in research departments’ revenues increases
after GARS.
I then examine how the turnover-pay relationship varies over time and across stocks
covered. The estimate on the AT urnover U nderwriting is insignificant in the earlier part
of the sample, but positive and significant in the later part (Table 6, Columns 3 and 4). An
analyst benefits from trading turnover that their research generates and commissions that it
attracts for the broker. The turnover-compensation elasticity increases to 0.00009. Compared
to the full-sample average effect (Table 3), the after-GARS turnover-compensation elasticity
is 4.5 times stronger among stocks that the broker underwrites.

24
 These estimates are in line with the after-GARS, turnover-based compensation structure,
which also accounts for the underwriting relationships. Additionally, they contribute to past
literature showing that, despite the segregation, information flows between the departments
(e.g., Li et al., 2017) and the success of brokers’ underwriting business remains an important
factor of analysts’ compensation (Brown et al., 2015).
There is only one firm directly affected by GARS in the sample. UBS Warburg LLC
was among 10 financial institutions that committed to separate its research and investment-
banking departments. Although regulators targeted US institutions, the effect of indirect
compensation for covering investment banking clients was strong amongst non-US brokers
too. Financial institutions may have voluntarily complied with the new regulation to avoid
bad publicity related to favorable treatment of underwriting clients.18 My findings show that
US practices may have spilled over to European institutions. The turnover-pay relationship
was insignificant prior to GARS, but is positive and significant after it (Table 6).

VII.C Robustness tests

The results suggest different turnover-pay sensitivities before- and after-GARS. However,
an increase in analyst experience over the sample period could also explain these patterns.
Analysts are more established in their careers during the second half of the sample. The
average number of years of analyst experience was 3.4 in the pre-GARS period (up to 2003)
and 6.2 in the after-GARS period (after 2003). Selecting analysts, who issue a relatively
high number of recommendations, and defining the career start as the first appearance in the
I/B/E/S database (started in 1993) can explain this difference between the two subsamples.
I examine if the oversampling of experienced analysts in the after-GARS period could affect
the turnover-pay sensitivity.
First, I augment the initial regressions with measures of analyst age, experience, and both
18
After a long investigation New York Attorney General Eliot Spitzer announced that Merrill Lynch “was
hyping stocks to win lucrative investment-banking work from corporate clients and was misleading investors
in the process” (Gasparino, 2002).

25
- age and experience. Including these controls does not significantly affect the coefficients
on AT urnover U nderwriting and AT urnover N onU nderwriting in either the pre-GARS or
post-GARS period (please refer to Table OA1 in an online appendix). Second, splitting the
sample into two subsamples by analyst age or experience does not replicate the results of the
split to pre/post-GARS. This finding reinforces the notion that the pre/post-GARS period
split is not a substitute for an age or experience split (Table OA2 in an online appendix). If
pre/post-GARS periods were tightly related to analysts’ experience, the sample split between
pre/post-GARS periods and less/more experience would yield the same estimates. The
estimates differ substantially, even though these differences are not statistically significant.
This result is potentially due to small subsamples.

VIII Turnover-pay link and analysts’ experience

The literature shows that brokers treat experienced analysts better than inexperienced ones.
First, analyst compensation increases with in-job practice. The pay rises as they earn “All-
Star” recognition (Groysberg et. al., 2011). Second, experienced analysts are less likely to
be terminated for mistakes. Inexperienced analysts are more prone to lose their jobs for
inaccurate research (Hong et al., 2000). Since experience is an important factor of analyst
compensation, I examine if it is also related to the turnover-pay relationship.
I split the sample into two subsamples based on analyst experience, which I define as
number of years since an analyst first appeared on I/B/E/S (Groysberg et al., 2011; Hong and
Kubik, 2003). I examine whether the turnover-pay relationship is similar between analysts
with at least four years of experience and those with more experience (sample median). A
different coefficient on the variable AT urnover would be in line with different compensations
for turnover-generating research between younger and older analysts.
The results suggest that the trading impact of analysts’ research significantly increase
their income. The coefficient on AT urnover is positive and significant, equal to 0.025, in

26
the subsample with proficient employees. However, it is insignificant in the sample of less-
experienced analysts (Table 7, Columns 1 and 2).
This finding may contribute to the explanation of why experienced analysts are more
likely to issue bold research (Hong et al., 2000), which leads to higher trading turnover
(Irvine, 2004). First, they are less likely to be terminated due to inaccurate research (Hong
et al., 2000). Second, my results support the notion that analysts are more likely to be
compensated when their recommendations generate trade.
There are several problems with the measure of experience. First, due to the sample
selection procedure, the analysts are later in their careers during the second half of the
sample. The analysts become more experienced as the sample period progresses. Second,
I define the variable Experience based on the year of the analyst’s first appearance on
I/B/E/S database. This dataset is relatively incomplete in 1993. My sample analysts are
likely to have more work experience than I can observe. To mitigate the potential problems
with the Experience variable, I use two different proxies for analyst experience - age and
annual income.19 Using an Age proxy, an analyst older than 34 years (median) is considered
experienced. Using an Income proxy, an analyst with above sample-year median income is
considered experienced.
The correlation between indicators for high levels of in-job experience and age, age and
income, and in-job experience and income are 0.59, 0.08 and 0.21, respectively. Despite a
relatively low correlation between the three proxies, the results are consistent for all three
definitions of practice. The turnover-pay relationship is only positive and significant for the
more experienced analysts (Table 7, Columns 1-6).
As a robustness test, I also control for analyst age in sample splits based on experience and
income. I control for experience in sample splits based on age. A decrease in the coefficient
on AT urnover would imply that the effect described in this study is exaggerated. However,
turnover-pay estimates do not significantly increase and remain significant in the subsamples
19
A non-analyst industry experience contributes to knowledge about the firms or industries they cover
(Bradley et al., 2017).

27
of experienced analysts (Table OA3 in the online appendix).

IX Further robustness tests

IX.A Omitted variable bias

Using the first difference regressions eliminates the time-invariant analyst-fixed effect. Yet,
more proficient analysts may experience a faster increase in their pay, which can lead to
biased estimates. Since I am unable to observe personal skills, talents or levels of education,
I eliminate cross-sectional variation in compensation by augmenting the regression (2) with
analyst-fixed effects. The relationship between compensation and abnormal turnover is then
evaluated at the analyst level, using variation of pay over time. The turnover-pay elasticity
remains the same, at equal to 0.00002 (Table 3, Column 2).
The pay rising at a higher rate for analysts working for more efficient or growing brokerage
houses may bias the estimates. To account for such a possibility, I eliminate cross-sectional
variation in compensation across different institutions by adding brokerage house-fixed effects
to a regression (2). The relationship between compensation and abnormal turnover is then
evaluated at a broker level, using variation of pay over time, across analysts working in the
same financial institution. The coefficient on AT urnover increases from 0.02 to 0.022, but
the turnover-pay elasticity does not change significantly (Table 3, Column 3).
Time-varying broker performance may affect analysts’ compensation among specific bro-
kers in particular years. Clustering standard errors at broker-year level mitigates this prob-
lem, but preserves the estimate of interest (Table 3, Column 4).

IX.B Selection bias

Sample selection particularities may lead to a survivorship bias. To examine variation be-
tween analysts’ pay and performance, I keep the observations with at least two consecutive
years of data. Therefore, my sample analysts are more likely to stay longer in the profession

28
and issue more recommendations, as compared to an average analyst. If longer-staying were
more likely to be senior, older, better paid or more experienced, the generalizability of this
study would be limited. The estimates would capture the relationship that holds for the
subsample of analysts. To evaluate the generalizability of results I define a senior analyst as
one who issues a recommendation with another person.20
First, I examine whether my sample includes an abnormally high number of senior an-
alysts. The fraction of collective recommendations was higher in my sample of stocks (4.7
percent) than in the remaining 1997 to 2007 year sample of recommendations on Swedish
stocks (2.6 percent). Second, I examine the sample selection bias by comparing my initial
estimates with the estimates from the subsample of analysts who are less likely to be senior
analysts. Eliminating analyst-year level observations with at least one co-issued recommen-
dation does not significantly change the results. The coefficient on AT urnover decreases from
0.020 to 0.019 (Table 3, Column 5). An additional test also shows that the turnover-pay re-
lationship is not weaker for analysts in their final year in a sample than for other analysts.
These findings lessen the problem of the enhanced turnover-compensation relationship due
to ex-post survival bias. Third, to mitigate oversampling more experienced analysts, I also
eliminate analysts at the top five percent level of experience, age or future income. The
coefficient on the variable of interest AT urnover does not statistically significantly change
(Table 3, Columns 6-8).
The sample selection mechanism weighs towards people who were in the sample for closer
to 10 years than the average. They were more likely to have characteristics required to be
successful in the profession and therefore, stay longer in it. Even though adding analyst fixed
effects (subsection IX.A) mitigates the problem, it still remains the limitation of the study.
Yet, allowing for this bias enables me to examine income sensitivity of the professionals whose
main occupation is equity research.
My sample may also be biased since it contains analysts with relatively uncommon last
20
According to the interviewed Swedish analysts, senior and junior analysts are more likely to issue rec-
ommendations together. It is very unlikely for two junior analysts to issue a recommendation together.

29
names. If these analysts are less likely to be of Swedish origin, they may have an infe-
rior network and different pay-performance sensitivity. Appendix C shows my investigation
suggesting that the sample analysts are not less likely to be of non-Swedish descent than
the other analysts. The results of the robustness tests are in line with the turnover-pay
relationship not being driven by a sample-selection bias.

IX.C Drivers of a trading volume

Brokerage-stock turnover or stock-specific events may drive the turnover-pay relationship. I

provide additional tests mitigating these concerns.
First, I investigate whether analysts are paid to cover stocks with a commonly high stock-
broker turnover, rather than being paid for increasing the turnover. I define T urnover as
a sum of event-period trading volume. Unlike AT urnover, I do not subtract the estimated
trading value from T urnover. I demonstrate that the estimate on T urnover is not signif-
icant (an online appendix, Table OA4, Column 1). This finding is in line with brokerage
houses not compensating analysts for merely following well-traded firms. Analysts who issue
recommendations on frequently traded stocks are not rewarded more than other analysts.
Next, firm-specific events may affect both – the analyst’s decision to issue a recommen-
dation and the investor’s decision to trade that stock. The turnover generated around the
recommendation release date can be encouraged by that event, rather than by the new rec-
ommendation. If analysts typically update recommendations in response to firm-specific
events, then it is less likely a coincidence that two recommendations are issued close to each
other in time, on the same stock by two different brokerage houses and more a reaction to
news. To avoid such events, I identify recommendations with a competing recommenda-
tion from another brokerage house, issued within a [-5,5] day window.21 I split the variable
AT urnover into two components. One part of AT urnover refers to an abnormal turnover
around isolated recommendations, while another part refers to an abnormal turnover around
21
I use the same event window as Anderson et al. (2018).

30
competing recommendations. I find that coefficients on the estimates of the two components
are not significantly different from each other in an adjusted version of a regression (an online
appendix, Table OA4, Column 2).
A substantial amount of information about a firm is released with an earnings announce-
ment, making it an important determinant for the level of a recommendation. I run a similar
test to the previous one, but instead of identifying recommendations issued close in time to
each other, I identify recommendations issued close to a firm’s earnings-announcement day.
Again, the coefficient on the part of AT urnover generated neighboring earnings announce-
ments is not significantly different from the coefficient on the remaining part of AT urnover
(an online appendix, Table OA4, Column 3).
These results support the initial prediction that not just coinciding events, but also the
issue of a recommendation per se encourages trading turnover. They are also in line with
past literature demonstrating that recommendations issued close to earnings announcements
are not special. Anderson et al. (2018) use Swedish data to show that differences in abnormal
profits to recommendation upgrades and downgrades are not statistically different between
recommendations issued close to earnings-announcement days and other recommendations.

IX.D Cross-listing

Some stocks during the sample period were simultaneously listed on Swedish and foreign
stock markets. Cross-listing may result in investors observing Swedish brokers’ research on
a Swedish stock but trading that stock on a foreign stock exchange. Not observing the full
trading volume of cross-listed stocks on non-Swedish exchanges may lead to biased estimates.
Interviewed analysts explained that research-issuing Swedish brokerage houses open their
trading offices in foreign cities with large stock exchanges to capture more trading volume.
Foreign investors sometimes use Swedish analysts’ insights and are likely to compensate the
broker for these insights by trading a particular stock via a Swedish broker’s office in the
country of the cross-listed stock’s exchange. In such cases, I observe the recommendation that

31
an analyst issues, but I do not observe the entire volume of broker-implemented transactions
in the specific stock. I lack the portion of broker trading that is transacted on a foreign stock
exchange. To evaluate how this shortage of data affects my results, I first analyze trading
turnover by the type of trader.
According to the interviewed Swedish analysts, retail investors usually observe a recom-
mendation and trade on the same broker’s trading platform, on which they are registered.
These investors are unlikely to see the foreign analyst’s recommendation and trade with the
foreign brokerage house. Therefore, it is doubtful that trading in cross-listed stocks by retail
investors could affect the results in this study.
Large institutional investors are usually not limited by the nationality of the stock ex-
change. One interviewed analyst indicated that these investors trade on an exchange in which
the stock is the most liquid. Using the Capital IQ global stock-trading dataset, I identify
Swedish stocks listed on foreign stock exchanges. During the 1997 to 2007 period, I observe
18 stocks listed on SSE, as well as on at least one of 11 other foreign exchanges. Most firms
were cross-listed in Frankfurt (7), Helsinki (3), Oslo (3), and Munich (3). Stocks traded on
multiple stock exchanges were potentially more liquid on SSE than on other stock exchanges.
For the sample Swedish stocks listed on at least two exchanges, the average of 99.4 percent
trading turnover was transacted on SSE, with this fraction ranging from 92 percent to 100
percent. Therefore, if stock liquidity was an important determinant for large institutional
investors choosing a stock exchange, they were more likely to choose SSE. In such cases, their
trading information is captured by this study.
Small institutional investors may observe research of a Swedish brokerage house and trade
via its office in another country. In such cases, I would observe analyst income, but not the
whole trading volume via brokerage houses, which may lead to biased trading-pay estimates.
I run two tests to evaluate this concern and the robustness of my results.
I split analysts’ annual generated trading volume, AT urnover, to AT urnover generated
with stocks listed only on SSE and stocks traded on at least two exchanges. The coefficient

32
on the latter variable is not lower than on the former, supporting the robustness of my results
(an online appendix, Table OA4, Column 4). I then scale the variable AT urnover by the
fraction (92 percent to 100 percent) of the total stock turnover transacted on SSE. This
adjustment does not change the initial coefficients, suggesting that trading in cross-listed
stocks is not likely to erase the turnover-pay relationship for analysts covering cross-listed
stocks (an online appendix, Table OA4, Column 5).

X Conclusions

Stock trading increases after an analyst releases research on the stock (e.g., Aitken et al., 2001;
Irvine, 2004; Mikhail et al., 2007). Brokers earn trading commissions on a trading volume
regardless how valuable the recommendation is for investors. Brokers’ utility increases in
commissions and they may encourage analysts to issue trade-enhancing research. If brokers
compensate analysts for trade-generating rather than for accurate research, the analysts
face a conflict of interest. The existence of this conflict was assumed in past studies (e.g.
Hayes, 1998), but has never been tested due to highly protected personal income and usually
aggregated trading data. This paper contributes to the previous literature by empirically
evaluating the broker-turnover/analyst-compensation link.
I document a strong relationship between analysts’ compensation and the turnover that
their research generates. This relationship is significant when analysts are experienced
or when they issue relatively positive recommendations. Additional analyses show that
a turnover-pay relationship is strongest when analysts’ research induces trading in invest-
ment banking clients’ stocks, especially when direct compensation for collaborating with an
investment-banking department is restricted.
This analyst compensation structure is likely to raise a conflict of interest and potentially
lead to less predictive research. First, analysts may prefer to issue trade-enhancing, rather
than return-predicting, research. With the trading commissions decreasing over time, the

33
trade-encouragement may increase. Second, analysts may also be triggered to release opti-
mistic, but not predictive, research. The turnover-pay relationship is significant only when
an analyst issues positive recommendations. Third, analysts may be motivated to issue less-
precise forecasts for stocks underwritten by their own brokerage house. I show that the
turnover-pay link is strongest when an analyst covers affiliated stocks. These results support
the notion that analysts face misaligned incentives and the demand for regulators’ attention.
This study contributes to a current regulatory debate. The European Union (EU) re-
sponded to trade-generating incentives with the Markets in Financial Instruments Directive
(MiFID II) regulation. Starting in January 2018, the EU requires financial companies in 31
European countries to unbundle research fees from brokerage fees and commissions. This law
will potentially reduce the importance of trading-turnover channels to pay for research ser-
vices, which was previously seen as an example of misaligned incentives. These new changes
may make the research fairer in the EU. However, MiFID II regulation is relatively fractional.
It applies to institutions with headquarters in a limited number of countries. Non-European
institutions are still allowed to indirectly charge clients for research via trade commissions.
A regulation for a limited number of market participants may become a burden for EU
institutions and make British brokers more attractive after Brexit.
Even though I show evidence that this is an unlikely scenario, the limitations of this
study may include the country representativeness, sample selection and survivorship bias.
First, compared to the largest stock markets, SSE is relatively small and populated mostly by
Swedish analysts. The agency problems may be less pronounced in Sweden if (1) maintaining
a reputation is more important in a small market, where practitioners tend to know each
other better, and (2) sample analysts have features of a Swedish character, such as shyness
and conflict avoidance (Daun, 1996). In such cases, the agency problems and a turnover-
pay relationship are likely to be stronger in larger, developed markets. Second, the sample
analysts are relatively more active and more experienced than the remaining analysts. If
they also have a different turnover-pay sensitivity, the generalizability of this study may be

34
limited to the more active analysts. Future research should try to overcome these potential
problems.

35
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38
Tables

Table 1: Descriptive statistics

Variable N Mean Std. dev. Min Median Max

Income, mSEK 380 1.86 1.65 0.14 1.53 13.91
Recommendations 380 7.15 5.52 1 6 35
Firms covered 380 4.18 2.63 1 4 14
Underwriting 380 0.18 0.54 0 0 4
Age 380 35.04 6.02 23 34 60
Experience 380 4.74 3.12 0 4 13

This table presents summary statistics for variables used in the study. Income is the analyst’s total annual
income in millions of Swedish krona. Recommendations and F irms covered count the number of recom-
mendations the analyst issued, and the number of firms they covered in a year. The U nderwriting variable
counts the number of firms, which have or had underwriting relationship with analyst’s broker during the
current year or over the last three years. Age is the analyst’s age. Experience measures the number of years
since the first analyst’s record on the Thomson Reuters I/B/E/S database.

Table 2: Daily turnover

Broker Statistic Event Event Estimation Statistic Event Event

(-5,10) (-1,1) (-20,-10) (-5,10) (-1,1)
Recommending mean 30.86 35.61 25.20 difference 5.66 10.41
sd 56.26 68.99 48.64 t-stat [8.64] [7.79]
Other mean 15.88 18.96 14.36 difference 1.52 4.60
sd 30.89 39.22 28.05 t-stat [5.38] [10.08]
difference 14.99 16.65 10.84 difference 4.14 5.81
t-stat [12.17] [10.89] [10.07] t-stat [5.80] [4.83]

This table presents the summary statistics of broker-stock daily-trading turnovers via a recommending broker
and via other brokers. It compares trading levels, winsorized at 1 percent and 99 percent levels, before the
issue of a recommendation [-20,-10], to the recommendation event [-1,1] and the extended, recommendation
event [-5,10] periods. The last two columns of the table present the difference between the turnover levels in
the estimation and the event windows, with the significance of these differences, t-stat reported in brackets.
All values are in million SEK, except for the bracketed values.

39
 Table 3: Turnover-income sensitivity

(1) (2) (3) (4) (5) (6) (7) (8)

ATurnover 0.020*** 0.020*** 0.022*** 0.020*** 0.019*** 0.023** 0.020*** 0.017**

(0.007) (0.007) (0.007) (0.007) (0.006) (0.011) (0.007) (0.007)
Recs -33.983** -40.981** -36.798*** -33.983* -30.471* -34.342** -32.670** -32.567**
(14.440) (18.904) (12.251) (19.054) (15.981) (14.470) (14.880) (15.686)
Firms 64.994* 85.513** 69.027** 64.994* 54.690 64.736* 66.443* 52.423
(33.896) (42.253) (26.085) (38.426) (36.501) (33.691) (34.583) (34.641)
Portfolio 145.363 262.605 210.549 145.363 150.146 150.861 106.981 142.574
(123.760) (190.904) (174.240) (130.721) (133.042) (126.798) (117.688) (126.624)

N 254 254 254 254 236 249 243 242

R-squared 0.376 0.549 0.440 0.376 0.393 0.381 0.364 0.407
Year FE Yes Yes Yes Yes Yes Yes Yes Yes
Br. FE No No Yes No No No No No
An. FE No Yes No No No No No No

The dependent variable is annual income in thousands of Swedish krona. AT urnover is an abnormal cu-
mulative turnover, added over the periods of recommendation-issuing event days [-5, 10]. All regressions
control for the quantity of recommendations issued (Recs), firms covered (F irms), and value of these firms
(P ortf olio). All variables represent the differences in values between two consecutive years. Regressions
include year-fixed effects (all), analyst-fixed effects (Column 2) and broker-fixed effects (Column 3), but the
table does not report their coefficients. The regression in Column 5 includes observations with analysts
issuing all their recommendations alone that year. Columns 6, 7, and 8 exclude observations with higher
than the sample’s 95th-percentile level of experience, age or next-year income, respectively. Standard errors
are clustered at analyst-(Columns 1, 4-8), broker- (Column 3), broker-year-level (Column 4) and presented
in parentheses below the coefficients. ***, **, and * denote statistical significance at the 1%, 5%, and 10%
levels, respectively.

Table 4: The types of recommendations by the stock returns

Recommendation Predictive Positive Negative

Strong buy Top-quartile Not top-quartile

Buy Above median or positive Negative
Hold Positive Negative
Sell Below median or negative Above median
Strong sell Negative or below the Positive and above
bottom-quartile bottom-quartile

The table defines the types of recommendations depending on their actual values (strong buy to strong
sell) and ex-post returns over a one-, six- or 12-month period. The table entries refer to the absolute stock
performance (positive or negative returns) or the stock performance, relative to the performance of other
stocks on SSE (quartiles, median).

40
 Table 5: Turnover-pay relationship by the types of recommendations

(1) (2) (3) (4) (5) (6)

Evaluation period, months 1 6 12 1 1 1

ATurnover Predictive 0.029 0.026 0.006 0.015

(0.018) (0.026) (0.030) (0.016)
ATurnover Positive 0.022*** 0.019*** 0.021*** 0.014**
(0.006) (0.006) (0.007) (0.006)
ATurnover Negative -0.023 0.002 0.008 -0.016
(0.035) (0.044) (0.047) (0.037)

Observations 244 237 220 244 244 244

R-squared 0.384 0.377 0.384 0.374 0.377 0.372

The dependent variable is an annual income in thousands of Swedish krona. AT urnover is an abnormal cumu-
lative turnover, adding up the periods of recommendation-issuing event days [-5, 10]. A variable AT urnover
is split to an abnormal trading rising from recommendations that are predictive (AT urnover P redictive),
positive (AT urnover P ositive), and negative (AT urnover N egative). The types of recommendations are
defined by comparing their forecasts with the stocks’ actual and relative returns over one month (Columns
1, 4-6), six months (Column 2), and 12 months (Column 3). Regressions control for the quantity of recom-
mendations issued, firms covered, value of these firms and year-fixed effects, but the table does not report
their estimates. All variables represent the differences in values between two consecutive years. Standard
errors are robust to analyst-level clustering and are presented in parentheses. ***, **, and * denote statistical
significance at the 1%, 5%, and 10% levels, respectively.

41
 Table 6: Analyst income and underwriting relationship

(1) (2) (3) (4)

GARS Before After Before After

ATurnover 0.007 0.013**

(0.046) (0.006)
ATurnover Underwriting -0.391 0.090**
(0.463) (0.038)
ATurnover NonUnderwriting 0.013 0.013*
(0.049) (0.007)
Recs -98.683*** 2.225 -99.821*** 2.339
(31.004) (15.006) (32.514) (15.183)
MeanRec -74.684 -20.001 -80.854 -11.588
(73.998) (66.611) (73.272) (67.745)
MeanRec Underwriting -54.286 200.517 -76.730 242.970
(209.374) (480.273) (214.274) (474.686)
Firms 171.817** -4.702 169.862** -4.462
(77.353) (33.085) (79.979) (32.875)
Portfolio 214.532 139.922 232.013 139.802
(212.825) (141.965) (219.007) (143.928)

Observations 112 142 112 142

R-squared 0.104 0.020 0.111 0.024

The dependent variable is annual income in thousands of Swedish krona. AT urnover is an ab-
normal cumulative turnover, adding up the periods of recommendation-issuing event days [-5, 10].
AT urnover U nderwriting is a part of AT urnover that arises from trading stocks of firms that issue their
equity with the broker over the current year or the last three years. AT urnover N onU nderwriting is
AT urnover that is not AT urnover U nderwriting. All regressions control for the quantity of recommen-
dations issued (Recs), firms covered (F irms), value of these firms (P ortf olio), and the average level of
recommendations that the analyst issues on all stocks (M eanRec) and on the stocks of the underwriting
clients (M eanRec U nderwriting). The estimates are reported on the subsamples of 1998 to 2003 (Columns
1, 3) and 2004 to 2007 (Columns 2, 4). All variables represent the differences in values between two consec-
utive years. Standard errors are robust to analyst-level clustering and reported in parentheses. ***, **, and
* denote statistical significance at the 1%, 5%, and 10% levels, respectively.

42
 Table 7: Cross-sectional turnover-income sensitivity

(1) (2) (3) (4) (5) (6)

Subsample Inexp Exp Younger Older Paid less Paid more

ATurnover 0.008 0.025*** 0.010 0.025*** 0.006 0.052***

(0.021) (0.006) (0.015) (0.007) (0.008) (0.018)
Observations 105 149 124 130 129 125
R-squared 0.420 0.431 0.480 0.360 0.370 0.530
The dependent variable is income in thousands of Swedish krona between years t and t+1. AT urnover is an
annual, abnormal cumulative turnover over the periods of recommendation-issuing events. AT urnover adds
up trading volumes from five days before the recommendation-announcement date to 10 trading days after it.
The estimates are reported on the samples of analysts: Less than/equal to four years (Column 1) or more than
four years (Column 2), since their first appearance on I/B/E/S; less than/equal to 34 years of age (Column 3)
or more than 34 years (Column 4) of age; who receive less than/equal to (Column 5) or more than (Column
6) the sample-year median income. All regressions control for the quantity of recommendations issued, firms
covered, value of these firms and year-fixed effects, but do not report these coefficients. All variables represent
the differences in values between two consecutive years. Standard errors are robust to analyst-level clustering
and reported in parentheses. ***, **, and * denote statistical significance at the 1%, 5%, and 10% levels,
respectively.

43
Figures

Figure 1: Composition of recommendations issued and stock performance

200
150
Index, %
100
50

1997 1999 2001 2003 2005 2007

Year

Buy Sell
Index

This figure displays the share of buy (strong buy and buy) and sell (strong sell and sell ) recommendations
issued from 1997 to 2007, and the value-weighted return of stocks listed in Stockholm (OMX SPI index). All
values are scaled by their levels in 1997 and expressed in percent.

44
 Figure 2: Annual income

A dashed line shows the average, gross annual income in Sweden. I obtained data on income in US dollars
from the OECD database. I acquired the USD/SEK average annual exchange rate from Riksbank database.
Other lines depict the 10th , 50th , and 90th percentiles of sample analysts’ annual income, respectively. All
amounts are in millions SEK.

45
A Appendix. Data collection

I obtain all 13,953 recommendations issued on stocks traded on SSE during 1997-2007-year
period. Three percent of recommendations were issued by more than one person, leading
to a total of 14,368 recommendation-analyst observations, issued by 1,449 analysts. I sort
the analysts based on the number of recommendations issued during the period. Then, to
relinquish outliers (analysts who assigned very few recommendations), I focus on the top
204 active analysts, who issue 60 percent of recommendations. Active (other) analysts issue
an average of 42.3 (4.6) recommendations. Allowing for a bias toward analysts who issue
more recommendations enables me to investigate the income sensitivity of those professionals
whose main occupation was equity research.
To obtain income data, I require individuals’ full names and dates of birth.22 First, I
find the analysts’ full names either on the brokers’ websites or the Swedish Securities Dealers
Association website.23 Second, I use the online daily updated register, Ratsit, to collect
addresses and dates of birth of people with those name living in Sweden. Third, to eliminate
impossible matches for the analyst positions that I found on Ratsit, I search for analysts’
dates of birth or their university graduation dates on the analysts’ accessible CVs, university
websites, or social networks. I then use the computers at the Swedish Tax Agency to search
for each person’s income by using their name, last name and date of birth. In cases where
I fail to reduce my findings to one, I search for the income of two individuals. I select the
person with the more feasible income for the position. If both of the individuals’ incomes are
feasible, I remove them from my sample. In several cases, I was able to confirm an analyst’s
identity by obtaining their income from the media. Due to certain very common names in
Sweden, or a failure to find the person in the registers, the population of 204 analysts narrows
down to a sample of 94. The individuals who remain in the sample tend to have less common
last names.
22
The Thomson Reuters I/B/E/S database codes analysts with their surname and the first letter of their
first name.
23
http://www.swedsec.se/licensierade-radgivare

46
 After cleaning the dataset, 653 analyst-year observations remain in the sample. I eliminate
eight of them because their compensation is not recorded in the particular year. Those
analysts had moved abroad and were not required to declare their income in Sweden.
Moreover, I exclude analysts who are less likely to have worked for a full year. I delete
observations when annual income increases or decreases by a multiple of more than five. I also
exclude analyst-year observations if trading volume for the stock they covered is missing at
the broker level. I eliminate observations when trading data is missing in the estimation or in
the event period. This reduces the sample to 86 analysts, who issue 2,717 recommendations
in 380 analyst-year observations.
The sample is representative of a population. It covers 68 percent of companies that had
at least one recommendation issued during the period of interest. Forty-seven brokers issued
stocks on Swedish firms from 1997 to 2007. My sample covers 20 of them. Even though I
only focus on 43 percent of brokers, they are the more active brokers, which issued over 76
percent of recommendations.

47
B Appendix. Comparison of sample and population of

recommendations

This study uses recommendations issued on Swedish stocks during the 1997 to 2007 period.
Differences in recommendation-issuing patterns between Swedish stocks and other stocks may
limit the generalizability of my results. To evaluate these concerns, I compare recommenda-
tions on: 1) sample stocks - the 2,717 recommendations from my sample of Swedish stocks;
2) US stocks - 366,724 recommendations (I/B/E/S dataset); 3) non-US stocks - 819,054 rec-
ommendations (I/B/E/S dataset). All recommendations are evaluated on a five-point scale
from 1 (strong buy) to 5 (strong sell). Following Jagadeesh and Kim (2006), I calculate the
average annual recommendation for each of the three samples and plot these measures in
Figure 3. The figure shows that there is little difference in average recommendations be-
tween sample and international stocks. Sample recommendations differ from the American
recommendations, especially to the ones issued prior to 2002.
First, the average sample recommendation (2.548) is closer to the average recommen-
dation on international (2.544) than on American (2.295) stocks and is most closely align
to British and French recommendations (Jagadeesh and Kim, 2006). Second, the average
annual recommendation in my sample (2.395-2.858) is similar to that of international stocks
(2.392-2.645). Third, over time, average levels of sample and international recommendations
tend to fluctuate around the mean (Figure 3), whereas the average American recommenda-
tion demonstrates a sudden decrease in the middle of the sample period. The fraction of
buy recommendations on the US stocks decreases from about 70 to 50 percent, the globally
common level, in response to the 2002 scandals and after the implementation of NASD Rule
2711, which requires public dissemination of the distribution of ratings. Fourth, there is more
year-to-year variation in the average level of recommendations issued on non-US and sample
stocks than on American stocks (Figure 3), as they reveal a rapid jump between the first and
the second half of the period.

48
 Figure 3: Average recommendations
2.8
Average recommendation
2.2 2.4
2 2.6

1997 1999 2001 2003 2005 2007

year

Sample Non−US
US

The graph represents the average annual level of recommendations issued on a five-point scale, with 1 indi-
cating a strong buy and 5 indicating a strong sell. The averages are calculated for the sample, international
and US-stock recommendations.

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 C Appendix. Name commonality

Using the Ratsit.se website, I examine the commonality of analysts’ last names in Sweden.24
I focus on 204 analysts that issued 60 percent of recommendations on Swedish stocks over
the 1997-2007-year period. I keep a subset of analysts with less-common last names. In 2018,
the average (median) number of people registered in Sweden with the same last name was
987 (124) in my sample and 41,375 (291) among the remaining part of the 204 most-active
analysts. If sample analysts are more likely to not be of Swedish descent, they may have an
inferior network and different pay-performance sensitivity.
In order to mitigate the concern for non-native discrimination, I examine the origins of
analysts’ names. To do so, I asked two native-Swedes to evaluate whether each of the 204
analysts’ last names were Swedish. According to them, 93 percent of the final sample of
analysts have Swedish last names. The six non-Swedish names have Polish (2), English (1),
German (1), Indian (1) and unrecognized (1) origins.25 According to my sources 79 percent to
85 percent of the remaining top-204 sample analysts have Swedish last names. The difference
between 93 percent and 79 percent is significant and between 93 percent and 85 percent is
not statistically significant at five percent level.
Since the fraction of Swedish last names was not lower in the final sample of analysts, the
sample analysts were not more likely to face discrimination on non-native grounds. This is
in line with the unlikely distortions in turnover-pay sensitivities due to an analyst’s foreign
background.

24
This database uses a person’s last name to see how many people with that name are registered as currently
living in Sweden.
25
I used a number of websites to examine the origins of the last names.

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