Lecture 2 - Investment Banking and Brokerage Lecture 2 Equity Research IPO Equity Research Purpose of equity research is to assist in Selling

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Investment Banking and Brokerage Lecture 2: Equity Research & IPO
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Equity Research Purpose of equity research is to assist in: Selling stocks in primary markets Buy/sell in secondary markets Three types of clients: Issuing companies (pressure to deliver positive earning forecasts) Individual investors (pressure to deliver accurate forecasts) Institutional investors (looking for expertise, non public information, investment ideas) Research is critical to franchise of investment bank
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What do research analysts do? “Sell side” analysts Follow a number of stocks in a given industry Analyze and advise portfolio managers Produce written reports including earnings forecasts (12 months) and target prices Discounted cash flow based valuations Buy-sell recommendations based on the difference between current price and targeted price Develop in-depth understanding of
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Ratings Intermediate-term investment ratings based on expected total return within 12 months: Strong buy: 20% minimum Buy: 10% minimum Neutral: 0% minimum Sell (negative return) Long-term investment ratings Strong buy: 40% minimum Buy: 20% minimum Neutral: 0% minimum Sell (negative return)
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Concerns over Ratings Issue with conflict of interest Rating stocks with best interest of investor in mind Rating stocks with best interest of the company in mind Do analysts always do their homework? Do analysts really dig into the financial statements? Do analysts take representations from
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Conflict of Interest SEC action against Jack Grubman (top analyst with Salomon Smith Barney) http://www.sec.gov/litigation/complaints/comp18111b.htm Accusation that Grubman gave high ratings on telecom companies in exchange for investment banking fees to Salomon Accusation that Grubman published fraudulent research to promote investment banking client Issue is investment banking fees come at the expense of retail clients To add insult to injury: Grubman upgraded AT&T to help get his children into the 92nd St. Y preschool! Email to a friend: “You know everyone thinks I upgraded T [AT&T] to get lead for AWE [AT&T Wireless tracker]. Nope. I used Sandy to get my kids into 92nd St Y pre-school (which is harder than Harvard) and Sandy needed [the AT&T's CEO's] vote on our board to nuke [John] Reed in showdown. Once coast was clear for both of us (ie Sandy clear victor and my kids confirmed) I went back to my normal negative self on T. [AT&T's CEO] never knew that we both (Sandy and I) played him like a fiddle. “
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Global Analyst Research Settlement 2003 Global Analyst Research Settlement between SEC, NYSE, NASD, New York Attorney General and 10 firms: Bear Stearns Credit Suisse First Boston Goldman Lehman J.P. Morgan Merrill Lynch Morgan Stanley Citigroup UBS Piper Jaffray
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Global Analyst Research Settlement 2003 Focus on keeping investment banking and equity research separate
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This note was uploaded on 04/05/2010 for the course FINANCE AN FRE6111 taught by Professor Chappe,raphaele during the Spring '10 term at NYU Poly.

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Lecture 2 - Investment Banking and Brokerage Lecture 2 Equity Research IPO Equity Research Purpose of equity research is to assist in Selling

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