FinancE
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Resource1.docxOriginal Article
Inside the “Black Box” of Sell‐Side Financial Analysts
First published: 11 November 2014
https://doi.org/10.1111/1475-679X.12067
Cited by: 204
Accepted by Christian Leuz. We appreciate helpful comments from two anonymous reviewers, Mike Baer, David Bailey, Shuping Chen, Artur Hugon, Stephannie Larocque, Bill Mayew, Lynn Rees, Kim Ritrievi, Debika Sihi, Nathan Swem, Michael Tang (FARS discussant), Yen Tong, Senyo Tse, James Westphal, Richard Willis, Yong Yu, and workshop participants at Colorado State University, Georgetown University, Indiana University, Texas Christian University, Tulane University, the 2013 Southeast Summer Accounting Research Conference (SESARC), the 2013 Temple University Accounting Conference, and the AAA Financial Accounting and Reporting Section 2014 Midyear Meeting. This paper was a finalist for the 2014 FARS Midyear Meeting best paper award. We are thankful for survey design assistance from Veronica Inchauste of the Office of Survey Research at the Annette Strauss Institute, and the excellent research assistance from John Easter, Alexandra Faulk, Emily Hammack, Ashley Loest, Lauren Schwaeble, Sarah Shaffell, and Paul Wong. An online appendix to this paper can be downloaded at http://research.chicagobooth.edu/arc/journal‐of‐accounting‐research/online‐supplements .
ABSTRACT
Our objective is to penetrate the “black box” of sell‐side financial analysts by providing new insights into the inputs analysts use and the incentives they face. We survey 365 analysts and conduct 18 follow‐up interviews covering a wide range of topics, including the inputs to analysts’ earnings forecasts and stock recommendations, the value of their industry knowledge, the determinants of their compensation, the career benefits of Institutional Investor All‐Star status, and the factors they consider indicative of high‐quality earnings. One important finding is that private communication with management is a more useful input to analysts’ earnings forecasts and stock recommendations than their own primary research, recent earnings performance, and recent 10‐K and 10‐Q reports. Another notable finding is that issuing earnings forecasts and stock recommendations that are well below the consensus often leads to an increase in analysts’ credibility with their investing clients. We conduct cross‐sectional analyses that highlight the impact of analyst and brokerage characteristics on analysts’ inputs and incentives. Our findings are relevant to investors, managers, analysts, and academic researchers.
