Are SellSide Analysts For Sale?

The life of sellside research analysts has never been easy. Caught between investment bankers and clients, they are in an unenviable position from the get-go. Ten years ago the job paid well, but now the buyside gets the glory and the big bucks. Institutional equity salesmen control the fat expense accounts and have most of the fun, while analysts stay in the office late at night building models and dancing around draconian compliance issues that resemble a minefield.

Why bother with the BS? A recently published study claims it is because corporate executives running public companies hook up the analysts...

...according to the study, conducted between 2001 and 2003 and to be presented to next month’s annual meeting of the US Academy of Management, nearly four out of six Wall Street analysts admitted receiving favors from company executives. FT

Come again?

US executives have been able to secure more favorable research ratings for their companies from investment banks by bestowing professional favors on Wall Street analysts, according to new academic research to be published on Friday....The favors 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 street has always been rife with conflicts. Some of them are unavoidable.

Sellside equity salesman can parade dozens of analysts and CEO’s in front of buyside analysts over the course of a year, saving the buysiders precious travel time and bringing them valuable one-on-ones.  But buyside traders control the commission flow, often transacting with their “buddies”, a frustrating experience for those not sitting on the trading desk.  Sure, this type of graft is not as prevalent as it once was. But time is money, and you need to pay folks for schlepping through your office. By repaying the favor.  But enough of my rant.

What is the bottom line from this questionable analyst behavior?

“Favour-rendering to analysts is evidently widespread and . . . it seems to be compromising the value of the guidance these experts provide to investors,” said Michael Clement of University of Texas, who co-authored the study with James Westphal of University of Michigan.

Aha, we get it. But the research study of 1,800 equity analysts and hundreds of executives, was apparently carried out from ‘01 to ‘03. Spitzer cleaned up the street, right? Maybe, but hot button issues deserve belts and suspenders, and the CFA Institute is getting in the mix as well…

Activities such as these are in clear breach of our code of conducts and standards. Analysts should guard against both actual conflicts and the perception of conflicts,” said Kurt Schacht, director of the Center for Financial Market Integrity at the CFA Institute, which represents more than 80,000 analysts and fund managers.

Some people need to get out of their ivory towers and experience how things work in the real world. At least if they want to be taken seriously at this address.

Executives find favors bring better ratings
Financial Times

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The content contained represents the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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