Infectious Greed: Restoring Confidence in Americas Companies - page 77


Summary

Analysts are supposed to analyze firms and make stock recommendations. For the most part, they seem to be okay at it. However, there is more money to be made in investment banking, and many analysts work for investment banks. Has this compromised their objectivity? It seems so. Analysts were getting rewarded for luring investment banking businesses. They were encouraged to be bullish to keep firms ”both potential and current investment banking clients ”happy. This loyalty to the investment banking side of the business comes at the expense of analysts' loyalties to the investors who depend on their recommendations. Rules aimed at eliminating conflicts of interest have been passed. It may take some time before we know if they will work.

While we have focused on the problems in the analyst industry, there are many analysts who are trying to rectify some of these problems. The Association of Investment Management Research (AIMR), a professional association of analysts, has already been working with the SEC, Congress, and others to improve the integrity of analyst recommendations. Many of the new rules enacted by the SEC have been advocated by AIMR. As with the other governance monitors that we have discussed, the misbehavior of a minority has tarnished the reputation of the majority.


Endnotes

  1. Steven Rosenbush, Heather Timmons, Roger O. Crockett, Christopher Palmeri, and Charles Haddad, "Inside the Telecom Game," BusinessWeek , August 5, 2002, pp. 34 “40.

  1. Susan Harrigan, "Merrill's Internal Workings," Newsday , May 21, 2002, p. A53.

  1. Marcia Vickers and Mike France, "How Corrupt Is Wall Street?" BusinessWeek , May 13, 2002, pp. 37 “42.

  1. Steven Rosenbush, Heather Timmons, Roger O. Crockett, Christopher Palmeri, and Charles Haddad, "Inside the Telecom Game," BusinessWeek , August 5, 2002, pp. 34 “40.

  1. The source of these analysts recommendation examples comes from the NASD website, http://www.nasdr.com/pdf-text/0239ntm.pdf, July 2002.

  1. Stephanie Smith, "How Are Analysts Changing?" Money , September 2002, p. 89.

  1. Justin Fox, "Learn to Manage Your Earnings and Wall Street Will Love You," Fortune , March 31, 1997, pp. 77 “80.

  1. Many academic articles have cited this phenomenon . For example, see Francois Degeorge, Jayendu Patel, and Richard J. Zeckhauser, "Earnings Management to Exceed Thresholds," Journal of Business 72 (1999): 1 “34.

  1. Paul Sloan, "Blame the Pundits," U.S. News & World Report , October 9, 2000, p. 44.

  1. Anup Agrawal and Sahiba Chadha, "Who Is Afraid of Reg FD? The Behavior and Performance of Sell-Side Analysts Following the SEC's Fair Disclosure Rules," University of Alabama working paper, February 2002.

  1. Examples of earlier academic studies that cast doubt on analysts' abilities to pick stocks are many, so we have cited just two: R. E. Diefenbach, "How Good Is Institutional Research?" Financial Analysts Journal 28 (1972): 54 “60; Dennis Logue and Donald Tuttle, "Brokerage House Investment Advice," Financial Review 8 (1973): 38 “54.

  1. Brad Barber, Reuven Lehavey, Maureen McNichols, and Brett Trueman, "Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns," Journal of Finance 56 (2001): 531 “563.

  1. Georgette Jasen, "Investment Dartboard: Readers Easily Beat Pros and Darts," Wall Street Journal , August 9, 2002, p. C10.

  1. Peter Elkind, "Where Mary Meeker Went Wrong," Fortune , May 14, 2001, pp. 68 “82.

  1. Joseph Nocera, "The Big Picture: The Cheerleader, It Wasn't Analysis That Made Merrill's Internet Stock Analyst a Star," Money , June 1, 1999, p. 71.

  1. Marcia Vickers and Mike France, "How Corrupt Is Wall Street?" BusinessWeek , May 13, 2002, pp. 37 “42.

  1. Ibid.

  1. Mara De Hovanesian, "How Analysts' Pay Packets Got So Fat," BusinessWeek , May 13, 2002, pp. 40 “41.

  1. Gretchen Morgenson, "Bullish Analyst of Tech Stocks Quits Salomon," New York Times , August 16, 2002, p. A1.

  1. Daniel Kadlec, "Buy (I Need the Bonus)," Time , May 20, 2002, p. 55.

  1. Steven Rosenbush, Heather Timmons, Roger O. Crockett, Christopher Palmeri, and Charles Haddad, "Inside the Telecom Game," BusinessWeek , August 5, 2002, pp. 34 “40.

  1. Marcia Vickers and Mike France, "How Corrupt Is Wall Street?" BusinessWeek , May 13, 2002, pp. 37 “42.

  1. Mara De Hovanesian, "How Analysts' Pay Packets Got So Fat," BusinessWeek , May 13, 2002, pp. 40 “41.

  1. Daniel Kadlec, "Buy (I Need the Bonus)," Time , May 20, 2002, p. 55.

  1. Roni Michaely and Kent L. Womack, "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies 12 (1999): 653 “686.

  1. Emily Thornton, "Research Should Pay Its Own Way," BusinessWeek , June 3, 2002, p. 72.

  1. Steven Rosenbush, Heather Timmons, Roger O. Crockett, Christopher Palmeri, and Charles Haddad, "Inside the Telecom Game," BusinessWeek , August 5, 2002, pp. 34 “40.

  1. Daniel Kadlec, "Buy (I Need the Bonus)," Time , May 20, 2002, p. 55.

  1. Marcia Vickers and Mike France, "How Corrupt Is Wall Street?" BusinessWeek , May 13, 2002, pp. 37 “42.

  1. Richard Oppel, "Merrill Replaced Research Analyst Who Upset Enron," New York Times , July 30, 2002, p. A1.

  1. Charles Gasparino, "Merrill Replaced Its Tyco Analyst After Meeting," Wall Street Journal , September 17, 2002, p. C1.

  1. Peter Elkind, "Where Mary Meeker Went Wrong," Fortune , May 14, 2001, pp. 68 “82.

  1. Ibid.

  1. Marcia Vickers and Mike France, "How Corrupt Is Wall Street?" BusinessWeek , May 13, 2002, pp. 37 “42.

  1. Leslie Boni and Kent L. Womack, "Solving the Sell-Side Research Problem: Insights from Buy-Side Professionals," Dartmouth College working paper, August 8, 2002.

  1. Susanne Craig, "Securities Firms Do the Soft Sell in Their Ratings," Wall Street Journal , September 13, 2002, p. C1.