Investment banking & potential conflicts of interest
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Can I please have a short paragraph to answer the following question?
Joe Klein is an analyst for an investment banking firm that offers both underwriting and brokerage services. Joe sends you a highly favorable report on a stock that his firm recently helped go public and for which it currently makes the market.
What are the potential advantages and disadvantages in relying on Joe's report in deciding whether to buy the stock?
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Solution Summary
Joe Klein is an analyst for an investment banking firm that offers both underwriting and brokerage services. Joe sends you a highly favorable report on a stock that his firm recently helped go public and for which it currently makes the market.
What are the potential advantages and disadvantages in relying on Joe's report in deciding whether to buy the stock?
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It is sometimes seen that security analysts who provide recommendations on stocks to the market and investors via public media and other sources, tend to become biased in their recommendations towards stocks which their invesment banking counterparts in the company are also working with. For example, security analysts tend to provide positive recommendations on stocks which are underwritten by the invesment banking division of their company.
Thus, they become forced to issue positive recommendations in order to promote such stocks among the investors as investors generally follow such ...
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