Brokerage House brands and Equity Investors

Abstract

Choosing what brokerage house reports to rely on for equity investors is risky. The decisions’s outcome may impact investment returns. This paper investigates whether investors incorporate brokerage house brands into their investment decision-making process and the impact it has on stock returns. Applying the brand signaling framework derived from information economics, we theorize that the brand acts as a signal that reduces investor uncertainty about the quality of brokerage house recommendation and consequently impacts investor buying/selling decisions. Drawing on the marketing and brand literature, our research complements previous sell-side research that found brokerage houses have significant fixed effects. We define three brand components – brokerage house awareness, reputation and performance – that explain how stronger brokerage house brands lead to higher stock returns. The results highlight the impact of brokerage house brands on investment decisions that carries implications for corporate financial decision makers, investors and regulators.