Are financial analysts more independent after the implementation of NASD Rule 2711?

This paper provides evidence on the changes in the way that analysts generate stock recommendations after the SEC's approval of NASD Rule 2711 in May 2002, which introduced regulatory reforms to enhance the independence of analysts' research. We investigate the relations of analysts' stock recommendations with fundamental valuations and investment banking-related conflicts of interest during 1994-2005. We find a stronger relation between analysts' stock recommendations and the intrinsic value estimates relative to the stock prices and a weaker relation between analysts' stock recommendations and conflicts of interest in the post-Rule period than prior to the Rule. Moreover, the changes in the relation between stock recommendations and the intrinsic value estimates relative to the stock prices are greater for the recommendations issued by analysts with greater potential conflicts of interest. Our findings suggest that analysts are more independent after the implementation of Rule 2711.