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.