deals. Institutional investors pay about 4 to 5 cents per share, and trading
costs are said to be at least half of that per share. Thus the marginal rev-
enue available to help pay for investment research departments is one to
two cents per share, far lower than the cost of the research being produced.
Thus, the investment banking subsidizes research departments by paying
more than 50 percent of the direct costs of analysts’ salaries and other re-
search costs. Currently, there is no convincing evidence that investors are
willing to pay for independent research. It is possible that regulatory inter-
vention could force such a market and make it viable, but it is also possible
that the unintended impact would be less information gathering and less
price transparency.
The literature on security analysts in general and on analysts’ recommen-
dations in particular show that behavioral biases matter. Biases affect ana-
lysts’ choices and recommendations, and even more importantly, biases affect
how investors interpret those recommendations. Potentially the most valu-
able outcome of the current rulemaking and proceedings is to make investors
more aware of the potential biases in analysts’ pronouncements, since it is
unlikely any time soon that most market participants will choose to pay the
full cost of (possibly) unbiased investment research.
412 MICHAELY AND WOMACK