Who Benefits from Industry Knowledge of Sell-Side Analysts? Evidence from Broker Commission Payments and Client Fund Performance

Using novel data on financial analyst biographical information and mutual fund broker commission payments, we examine the impact of sell-side analyst industry knowledge on buy-side institutions’ commission allocation decisions and investment performance. We find that mutual funds allocate higher equity trading commissions to brokers providing industry expert analyst coverage for a larger proportion of fund holding firms. Client funds generate higher abnormal holding returns and execute more profitable trades on stocks with access industry expert analysts compared to stocks with no such analyst coverage. Exploiting shocks to research coverage emanating from analyst departures for identification, we find that client funds reduce commission allocations to brokers losing industry expert analysts and suffer declines in investment performance on stocks affected by the loss of industry expert analysts. Overall, our results are consistent with the view that brokerage houses as well as their buy-side clients benefit from the industry knowledge of sell-side analysts.