The paper addresses two core questions: do investment banks’ recommendations have an
impact on the allocation of portfolio flows in the emerging-markets asset class? Above all, are
these recommendations related to the business of investment banks? In order to answer these
questions, we constructed a unique database covering the period 1997-2006 for all the bond
recommendations made by the major investment banks that dominate the emerging bond
markets. The most important findings are as follows: 90 per cent of the underwriters recommend
buying or maintaining in their portfolios the bonds issued by the countries where they are acting
as lead managers; and investment banks’ recommendations are also correlated with the relative
size of the secondary bond market. In fact, there is a phenomenon that we call “too big to
underweight” meaning that investment banks do not send negative signals to investors of
countries that, given their size, are considered important for their business. Finally, by using
panel data analysis, we found that the impact of investment banks’ recommendations on
portfolio capital flows is more significant and more predictable than some macroeconomic
variables such as interest rate, economic growth and inflation rate. The first of the three major
policy lessons at stake is that there is a need for more detailed information disclosure by
investment banks in order to determine if past recommendations are related to macroeconomic
variables and financial variables or whether they are associated with the investment banks’
business in emerging economies. Second, government agencies should do a strategic monitoring
on what market is writing about their respective country vulnerabilities. Finally, given that
banks’ recommendations and portfolio flows are related, an international co-operation scheme
could be established to encourage investment banks to cover more countries.
The Usual Suspects
A Primer on Investment Banks' Recommendations and Emerging Markets
Working paper
OECD Development Centre Working Papers
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