Lifting the Lid: CEO, analyst ties can run deep

By Martha Graybow

NEW YORK (Reuters) - 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 (C.N: Quote, Profile, Research, Stock Buzz) star analyst Jack Grubman in 2002 allegedly upgraded AT&T (T.N: Quote, Profile, Research, Stock Buzz) -- 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.