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Incentives of Financial Analysts: Trading Turnover and Compensation

In this paper I investigate whether brokerage houses compensate sell-side security analysts for trading generating research (as argued by Hayes (1998)). I find that analysts are not compensated for covering stocks with high turnover; their income increases only in the form of abnormal turnover that their research generates for the broker. Moreover, in line with studies showing that young analysts are better off herding than issuing bold research, I find that brokerage houses only compensate more experienced analysts for influential research.