Skin in the Game: The Inputs and Incentives that Shape Buy-Side Analysts’ Stock Recommendations

• In Event: Financial Analysts and the Capital Market

Abstract

Buy-side analysts play an important role in capital markets through their influence on institutional investment decisions, but they are rarely the subject of academic research. We survey 344 buy-side analysts from 181 investment firms and conduct 16 detailed follow-up interviews to gain insights into the inputs and incentives that shape buy-side research, including the inputs to their stock recommendations, the determinants of their compensation, the frequency and value of their communication with company management, their beliefs about financial reporting quality, and the role of sell-side analysts in buy-side research. One important finding is that buy-side analysts indicate recent 10-K or 10-Q reports are more useful than quarterly conference calls, management earnings guidance, and recent earnings performance for determining their stock recommendations. In addition, although we find that producing profitable stock recommendations for their portfolio managers is the most important determinant of buy-side analysts’ compensation, less than 3% of buy-side analysts believe sell-side stock recommendations are very useful. Our study advances both the buy-side and sell-side literatures.

Authors

• Lawrence D Brown, Temple University

• Andrew C Call, Arizona State University

• Michael B Clement, The University of Texas at Austin

• Nathan Y Sharp, Texas A&M University