Wall Street analysts angling for a better job or entry into an exclusive social club can often get help from some well-placed sources: CEOs of the companies they cover.

That's the conclusion of a forthcoming academic study on the relationship between brokerage analysts and U.S. company executives.

In what's hardly comforting news for investors looking for objective stock picking advice, the study finds that personal and professional favors from top executives can reduce the likelihood that analysts will downgrade a stock.

The research is based on surveys and interviews with unidentified analysts and CEOs from 2000 until 2004, so it is unclear if analysts would answer the same way today.

Still, the authors say the findings suggest that the ties between CEOs and analysts can run deep.

Investors need to realize that analyst recommendations cannot be entirely objective, said James Westphal, a business professor at the University of Michigan, who co-wrote the paper with Michael Clement of the University of Texas, Austin. In order for them to get the best information from companies, they have to develop some kind of relationship with executives.

Wall Street sell-side analysts have long been under fire for alleged conflicts, though a $1.4 billion settlement that top investment banks struck with then-New York Attorney General Eliot Spitzer and the U.S. Securities and Exchange Commission in 2002 and 2003 was supposed to have cleaned up research practices.

In one legendary story, former Citigroup star analyst Jack Grubman in 2002 allegedly upgraded AT&T -- where former Citigroup Chairman Sandy Weill sat on the board -- in exchange for Weill's help getting Grubman's twin toddlers into an elite Manhattan preschool. Weill has said the upgrade and the preschool admissions weren't even remotely related.

In 2003, the NASD fined and temporarily suspended a former Merrill Lynch & Co. analyst, Phua Young, who was accused of issuing misleading reports on Tyco International Ltd.

The NASD accused of him of improper conduct, including flying on Tyco corporate jets and giving a $4,500 case of wine to Dennis Kozlowski, Tyco's former CEO, now in prison for fraud.


The upcoming study, a working paper to be presented at the annual conference of the Academy of Management in Philadelphia next month, found that 63 percent of analysts said they had received some type of executive favors.

The favors included offering to meet with the analysts' clients or putting them in touch with buyers and suppliers, as well as personal favors like career advice or help with club admissions.

The favors aren't for nothing, the study found. Analysts tended to reciprocate by maintaining their recommendations on a company even when negative information about its business is released, the study concludes.

At the same time, the study said, executives may retaliate against analysts who downgrade their stocks by bestowing fewer favors and cutting off their personal access to them.

Chartered Financial Analysts must abide by a code of ethics set out by the CFA Institute that says they cannot offer or accept gifts that reasonably could be expected to compromise their own or another's independence and objectivity.

Jonathan Stokes, a senior policy analyst at the CFA Centre for Financial Market Integrity, said analyst applicants are tested on the ethics code.

He said he had not seen the study but took issue with suggestions that providing analysts access to a company's suppliers, for instance, could be construed as favoritism.

Sometimes that's part of the working relationship of the analyst, he said. They want to talk to everyone -- not just the company.


Wall Street research departments have undergone a makeover following the 2002 Spitzer settlement, with new rules aimed at stopping analysts from touting companies to help win lucrative business for their firms' investment banking arms.

As a consequence, many brokerages spend less on research because the research units can no longer earn investment banking fees. Some analysts have moved to hedge funds and other buy side firms as well as to independent research boutiques.

The number of U.S. publicly traded companies with research coverage peaked at about 4,400 in 2000, but fell to about 3,600 in 2003, according to Ashwani Kaul, senior research analyst at Reuters Estimates, part of Reuters Group Plc.

There are now 4,285 companies with some sort of analyst coverage as more independent analysts have set up shop, he said.

Sheryl Skolnick, a health-care analyst at CRT Capital, said there's nothing wrong with building a professional relationship with executives as long as analysts are careful to ensure it doesn't have an impact on the independence of research. She said analysts often call on corporate managements if they lose their jobs and need career help.

But in general, she said, analysts are much less cozy with corporate managements than in the past, and she said she has never been the recipient of favors like help getting access to a private club -- nor is she surprised that she hasn't.

There is certainly no love lost between me and several of the management teams that I cover, she said.