Executives Do Favors for Wall Street Analysts, Get Better Ratings

The Finanical Times had a story on Friday about a new study that proved mutual back scratching to be alive and well on Wall Street. Researchers from the University of Texas in Austin and the University of Michigan spoke with 1,800 analysts and hundreds of corporate executives. They then tied back admissions of favors given to nearly two-thirds of all analysts they interviewed.

The study found that by offering analysts favours, ranging from recommending them for a job to agreeing to speak to their clients, executives sharply reduced the chances of a downgrade in the aftermath of poor results or a controversial deal.

More specifically, an analyst who took two favors was 50 percent less likely to downgrade the company's rating after poor results. According to the CFA Institute, yes, this is unethical behavior.

The sad thing? I sent a copy of the story to some colleagues, one of whom used to work in investor relations and the other a former investment banking type. Their take was, "Ho-hum." They had found that corruption was systematic in their experience.

And what happens to the individual investor trying to make intelligent decisions? They have a good chance of effectively underwriting, with their own money, these backroom relationships because they may keep putting money in a poor investment based on biased advice.