In their paper "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations," Journal of Business Finance and Accounting, authors Mokoaleli-Mokoteli, Taffler, and Agarwal tests whether sell-side analysts are prone to behavioral errors when making stock recommendations, as well as the impact of their investment banking relationships on judgment. The authors find that new buy recommendations on average have no investment value, whereas new sell recommendations do have value, although it takes time for the information to be assimilated by the market. They also find that new buy recommendations are distinguished from new sells both by the level of analyst optimism and conflicts of interest (no surprise there). Of interest, successful new buy recommendations are characterized by lower prior returns, while successful new sells do not differ from their unsuccessful counterparts in terms of these measures.

Interesting research, and somewhat intuitive - or at least it should be. New buy recommendations involve selling, and sell recommendations involve selling, ......., just a different kind.

A number of hedge funds are hiring talent from Wall Street as investment banks cut back on salaries and bonuses. As reported at Bloomberg, many traders, bankers, and analysts are giving up the once preferred bonuses and prestige of investment banks for the potential to cash in with hedge funds as the security once offered by investment banks decreases. As investment banks perform less underwriting and reduce leverage by selling assets, less money is being generated by Wall Street, translating to less bonuses come year end. Pay packages are expected to fall by 20% or more this year alone. Private equity is also benefiting from the dissatisfaction as they too are scooping up investment banking talent. Given the recent closures of small hedge funds, which in many cases are either shutting down entirely or simply being absorbed into larger funds, it looks as though the deck chairs of Wall Street will continue to shift over the summer as the market looks to right itself after the recent credit problems and current commodity and inflation issues.

An interesting article in this week's Barron's about how fair-value accounting is allowing companies to boost earnings by recognizing "gains" from being able to buy back their declining debt at cheaper prices. As mentioned in the article: "When a company's credit weakens and the yield on its debt rises relative to risk-free Treasuries, the debt becomes worth less to the holder. The financial company, which is the debt issuer, then takes a gain, because theoretically it could buy back its debt below face value." Given the level of exposure, the gains are not insignificant. For the first quarters, widening credit spread allowed Morgan Stanley to report $848 million in gains, Lehman Brothers reported $600 million, while Goldman Sachs reported $300 million. Of course, given that most of the long-term debt matures at par, any gains realized will reverse over time. But in the short-term when losses need to be covered, fair-value accounting allows for higher reported earnings, even though these earnings do not really justify the P/E ratio generated. As the market starts to move up, a reversal of recent accounting gains will be necessary.

Tickers: GS, LEH, MS

Bloomberg is reporting that M&A Advisory fees have fallen about $8.7 billion in Q1 2008 from $13.4 billion during Q1 2007. Goldman Sachs, the leader in M&A, has reported a 47% decline in fees from Q4 2007 to Q1 2008. Given potential lower trading returns (due to the market and less hedging/shorting of subprime as with last year), Goldman could have a more challenging year, even without the exposure and write downs some other banks are taking. Nonetheless, it may still be better position. The stock itself is testing support (double bottom), so we should get some clarity shortly.

Ticker: GS