Is having biased equity research better than having none at all? In most of Europe, investment banks advising companies in bid situations cannot also publish research on them. In the UK, for example, this is stipulated by the Takeover Code.
This apparently sensible rule has a cost. Companies in long-term bid situations can become under-researched. Of the 12 main analysts who originally covered the London Stock Exchange, six have been silenced for more than a year. Furthermore, the supply of research can be severely distorted if companies give mandates to multiple banks. Arcelor and Mittal Steel, which are embroiled in a takeover battle, have hired no less than 13 advisers between them. It is hard not be cynical about their motivation. At least one of Arcelor’s banks had expressed positive opinions about a deal it has now been hired to help prevent.
One solution is to allow banks to publish. Institutional investors are capable of reading between the lines, while banks need not distribute research to retail investors. Yet this would significantly increase the incentive for banks to compromise their analysts’ independence. The internet bubble showed that it does not take much for banks’ Chinese walls to be replaced by Chinese whispers. Ultimately, the conflict is probably inherent to full-service investment banks. Investors feeling starved of research may have to buy it elsewhere. In some cases that is already happening. In the past year, three boutique brokers have initiated coverage on the LSE.
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