OPTIMISM BIASES AMONG BROKERAGE AND NON-BROKERAGE FIRMS EQUITY RECOMMENDATIONS - AGENCY COSTS IN THE INVESTMENT INDUSTRY

This paper studies the investment recommendations made by brokerage an d nonbrokerage firms in an effort to examine the differential agency c osts across three unique recommendation production environments. Using the ACE database, recommendation production environments are categori zed into national, regional, and non-brokerage firms. The results prov e that differences exist between brokerage and nonbrokerage firms: 1) brokerage firms significantly inflate recommendations; 2) regional fir ms significantly inflate recommendations, compared to national firms; 3) brokerage firms' recommendations, compared to nonbrokerage firms' r ecommendations, are less credible and less predictive of future stock performance; 4) national firms have more reputational capital, and the refore, their recommendations are more predictive of investment perfor mance than the regional brokerage firms' recommendations.