A view to a deal: the effect of upcoming investment banking transactions on financial analysts' target price estimates.

This study investigates whether sell-side analysts issue inflated target price estimates to compete for investment banking mandates in the European Union (EU), and whether country-specific weaknesses in regulatory enforcement diminish the mitigating effects of stricter financial-market regulation. We find that, irrespective of previous business ties with the target firm, target prices become more optimistic (and, as a consequence, less accurate) in the run-up to an investment banking transaction for target firms located in countries with weaker enforcement regimes. In contrast, for firms in countries with stronger enforcement regimes, we observe the opposite to be the case. Furthermore, we find that analysts' optimistic biases have been mitigated, but not fully eliminated, since the implementation of the European Markets in Financial Instruments Directive (MiFID) in 2007 in low-enforcement countries. Overall, our results demonstrate that reducing country-level differences in enforcement constitute a significant factor in effectively regulating analysts' conflicts of interest, and in improving investor protection within the EU. [ABSTRACT FROM AUTHOR]

Copyright of European Journal of Finance is the property of Routledge and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)