Conflict of interest or confidence in stock

It is generally argued that analysts who own stock of companies they cover have a conflict of interest. Because of this, analysts are required to disclose their financial interests in securities of companies they cover. Thus note Ahmed E. Taha and John V. Petrocelli of Wake Forest University in Sending mixed messages: Investor interpretations of disclosures of analyst stock ownership ( www.ssrn.com ).

However, investors might perceive disclosure of analyst ownership differently than policymakers intend, the authors add. “Analysts who own stock that they recommend are arguably ‘putting their money where their mouths are.' Thus, analyst ownership may indicate that the analyst is more confident in, or will more closely follow, the stock. Therefore, a disclosure intended to discourage investors from relying on certain analysts' recommendations might instead encourage many investors to do so.”

The paper reports the results of authors' experiment, that a substantial proportion of investors view analyst stock ownership favourably, rather than as a warning of a troublesome conflict of interest. Instead, “a disclosure that briefly explained why analyst ownership is a conflict of interest would be more effective.”

Provokes rethink on policy measures on disclosure.

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House vs human capital

Do you want your parents to buy you a house, or put you through good education? A common answer from children may be ‘both,' but it looks like parents tend to opt for the physical asset rather than the intangible one.

Studying Italian households, using the Bank of Italy's Survey of Household Income and Wealth (SHIW), Elsa Fornero, Agnese Romiti, and Mariacristina Rossi, of University of Turin write in Does home ownership crowd out investment in children's human capital? that a strong preference for home-ownership makes parents inclined to consider the house as the typical bequest-friendly asset, even at the expense of children's education.

The authors find that Italian households, characterised by a relatively high propensity to save, have a strong preference for investment in physical capital, and particularly in housing wealth, which combines with a comparatively strong parental desire to leave some wealth to their children.

“The timing of the decision for (less wealthy) parents of whether to invest in their children's education can overlap with the timing of accumulation for the house purchase, a situation which can originate a displacement effect of investment in children's human capital (education) by investment in real estate.”

Higher educated parents, however, are better able to evaluate the future return on the investment in their children's education, and can expect this return to be higher with respect to less educated parents, the paper informs. Can stimulate introspection in households to reassess their priorities.

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