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Do Stock Analysts Really Offer Investors Independent, Objective Information?

Moneybeat blog (Wall Street Journal)
Stock Analysts Tell All!
April 25, 2013

Michael Clements McCombs Stock Analysts independent objective

The results of McCombs Accounting Professor Michael Clement's most recent research project, a study with Wall Street stock analysts detailing how they work and how they view their roles, "draws some striking conclusions," wrote Jason Zweig recently in The Wall Street Journal's Moneybeat blog.

Among the "striking conclusions" pointed out in Zweig's article:

  • 81 percent of analysts said "hedge funds" were their most important clients.
  • Fewer than a quarter of the analysts said that the “accuracy and timeliness” of their earnings forecasts were very important to their compensation.
  • Approximately one in four analysts has been pressured by a supervisor to lower earnings forecasts, presumably because that makes the forecasts easier for companies to beat – thereby pleasing investors and companies alike.
  • Only half of analysts said that primary research, like discussions with customers and suppliers, was very useful in forecasting earnings or recommending stocks.
  • Nearly 40 percent of analysts said that it was very likely that they would lose access to management or be "frozen out" of question-and-answer sessions on conference calls if they issued an earnings forecast well below the Wall Street average.
  • More than two-thirds said that private phone calls with management were far and away the most important factor in their work.

Wrote Zweig, "Any investor – especially any individual investor – still clinging to the delusion that Wall Street analysts provide an independent, objective and skeptical perspective on companies needs to read this study."

For more information

Download the working paper, Inside the 'Black Box' of Sell-Side Financial Analysts, published March 1, 2013, by Lawrence D. Brown, Temple University; Andrew C. Call, University of Georgia; Michael B. Clement, The University of Texas at Austin; and Nathan Y. Sharp, Texas A&M University

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