“Some investors, heartened by regulatory scrutiny of stock-research conflicts, expect big changes in the way securities firms rate stocks of their corporate clients,” writes Randall Smith in today’s Wall Street Journal.

“They shouldn’t.”

“Despite a raft of new rules enacted to curtail the influence of investment banking on Wall Street research, the nation’s top securities firms still consistently give higher ratings to stocks of their own banking clients, according to a review of the firms’ research disclosures. The statistics, which recently began appearing at the back of all Wall Street research reports under regulatory reform measures enacted last summer, quantify for the first time a pattern that lies near the heart of the uproar over alleged stock-research bias, and one that has persisted on Wall Street for decades.”

“The upshot: Individual investors still must take Wall Street research with a chunk of salt, some specialists say.”

‘ “There’s still a hesitancy to put a sell on a banking client,” says Chuck Hill, director of research at Thomson First Call, which tracks analysts’ stock ratings and earnings estimates. “There’s still a good possibility that some firms are still biasing things in favor of their clients — not to the extent they had been, but there’s still some of that in there.” ’

“Historically, Wall Street firms have tended to pick up coverage of companies for which they underwrite securities sales, including initial public offerings, and analysts have played a key role in evaluating the companies before agreeing to manage those sales. So securities firms argue that they wouldn’t underwrite, say, an IPO if they didn’t believe their analysts would issue a positive stock recommendation.”

“Conversely, if analysts wouldn’t be comfortable recommending the stock at that level, a Wall Street executive says, ‘we won’t do the deal.’ In addition, he says, it’s only natural for top securities firms to ‘want to do investment-banking business with the better-quality companies,’ which would also lead the firm to rate clients higher than average.”

“That said, take a look at the numbers. At Goldman Sachs Group Inc., 79% of all stocks with the highest ‘outperform’ rating were investment-banking clients, based on the firm’s most recent tally. But 61% of the stocks with the lowest ‘underperform’ rating were clients. At Morgan Stanley, 40% of all stocks rated ‘overweight’ were investment-banking clients, while 27% of stocks rated ‘underweight’ were clients.”