Analysts' characteristics, the research process and the impact of regulatory changes

Objectives: Uncertainty about the quality of analysts’ investment recommendations is a major concern for retail investors. Specifically, the information gathering, processing and transferring process appears to be a black box for retail investors. Prior research has primarily focused on understanding the stock valuation process including the applied methodological approaches at a broader level. However, from the investors’ perspective relevant information in the context of generating investment recommendations are still largely unknown. This is why we conducted a survey among sell-side and buy-side security analysts to uncover the black box.

Data/Methods: This study examines responses of 104 sell-side and buy-side security analysts to a survey sent out in order to understand how analysts conduct investment recommendations. In the survey we utilized a standardized questionnaire with both closed-ended and open-ended questions. The questionnaire is designed while considering the findings in the literature, such as introducing consistency and unambiguous questions. In contrast to previous surveys, we asked these analysts to provide detailed information on three core aspects namely 1) analyst-specific characteristics (e.g. age, educational background, competences, work experience, self-perceived accuracy), 2) the research process (e.g. information gathering, processing and transfer, the influence of computer-based evaluation models), and 3) conflicts of interest (e.g. success of regulatory guidelines, impact of employers’ activities).

Results: We find that analysts (strongly) rely on IT-based evaluation models when deriving investment recommendations. The average analyst in our sample graduated from university, has 10 years of professional experience and covers 12 firms on a regular basis. In addition, our results show that more than 50 percent of the analysts specify that their employers’ objective to generate brokerage commission (by regularly producing research reports) is very/rather influential with respect to the determination of investment recommendations. This is why we thoroughly examine the recent regulatory efforts to mitigate conflicts of interest. By and large, we find that analysts assess the recent regulatory guidelines to mitigate conflicts of interest rather less successful.