To Get Good Research, Phone the Analyst, Don’t Read his Reports

Yet

another reason to treat published sell-side analysis with a monster pinch

of salt:

By offering analysts favours, ranging from recommending them for a job to

agreeing to speak to their clients, executives sharply reduced the chances

of a downgrade in the aftermath of poor results or a controversial deal…

Nearly four out of six Wall Street analysts admitted receiving favours from

company executives.

The frequency of favours increased in line with the shortfall between the

company’s earnings and market expectations – a crucial determinant of analysts’

stock ratings.

The favours were instrumental in securing better treatment from analysts.

Analysts who received two favours were 50 per cent less likely than colleagues

to downgrade the company after poor results, the academics say.

The most popular favour, mentioned by nearly a third of respondents, was putting

ananalyst in touch with an executive at a rival firm, followed by the offer

of career advice, and agreeing to meet with the analysts’ clients.

The academics in question are Michael Clement from the University

of Texas and James Westphal of University of Michigan. This

is a great idea for a research paper, and it looks like a very strong result.

(Although I haven’t read the paper yet.)

The more that news like this comes out, the more it makes sense that sell-side

firms are asking their analysts to cut back on published research, and spend

more time talking one-on-one with their most valuable clients. I suspect the

main reason sell-side analysts repay favors done for them by executives is that

they know those executives will read their research. The executives will not,

on the other, hand, find out what the analyst said on a private phone call with

a hedge fund manager. So in those cases, the analyst can be rather more candid.

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