Conflict-of-Interest Reforms and Brain Drain in Investment Banks

Reforms on analyst conflicts of interest prohibit the use of investment banking revenue to fund equity research and compensate equity analysts. After the reforms, we find that star analysts from investment banks are more likely to exit the profession and move to the buy side than before. The departed star analysts' research is more accurate and informative than the remaining analysts who followed the same companies. These results are consistent with the reforms causing a brain drain in investment banks and potentially having an adverse effect on the consumers of the departed stars' research and the information environment of the companies followed by these stars