The Global Settlement, All-Star Analyst Departures, and Their Impact on the Capital Markets

The Global Research Analyst Settlement prohibited twelve large investment banks from tying equity analysts' compensation to investment banking revenues, causing a large number of Institutional Investor "all-star" analysts to exit the sell-side industry. Using a difference-in-differences specification, I find that the departure of all-stars caused their bank-industry underwriting groups to lose equity issuance market share. Market share losses were more severe for IPOs than for IPOs and follow-on underwritings combined. The higher the average quality of all-stars in a bank-industry, the more severe were the bank-industry's losses. Additionally, the departure of all-stars raised the cost of equity capital for IPOs underwritten by their bank-industry groups, particularly for IPOs that were more difficult to value. Ultimately, the loss of sell-side research talent, an unintended consequence of regulation, forced issuers to accept research coverage of inferior quality, raising the cost of obtaining public capital.