Abstract

http://ssrn.com/abstract=2228373
 
 

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Inside the 'Black Box' of Sell-Side Financial Analysts


Lawrence D. Brown


Temple University - Department of Accounting

Andrew C. Call


Arizona State University (ASU) - School of Accountancy

Michael B. Clement


University of Texas at Austin - Department of Accounting

Nathan Y. Sharp


Texas A&M University - Department of Accounting

June 24, 2014


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 detailed follow-up interviews covering a wide range of topics, including the inputs to their 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 analysts 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 the recent 10-K or 10-Q report. Another notable finding is that analysts have incentives to issue earnings forecasts and stock recommendations below the consensus to increase their credibility with 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.

Number of Pages in PDF File: 66

Keywords: sell-side analysts, analyst inputs, analyst incentives, private communication, analyst compensation, industry knowledge

JEL Classification: M40, G24, G28

working papers series


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Date posted: March 4, 2013 ; Last revised: June 25, 2014

Suggested Citation

Brown, Lawrence D. and Call, Andrew C. and Clement, Michael B. and Sharp, Nathan Y., Inside the 'Black Box' of Sell-Side Financial Analysts (June 24, 2014). Available at SSRN: http://ssrn.com/abstract=2228373 or http://dx.doi.org/10.2139/ssrn.2228373

Contact Information

Lawrence D. Brown
Temple University - Department of Accounting ( email )
Philadelphia, PA 19122
United States

Andrew C. Call
Arizona State University (ASU) - School of Accountancy ( email )
Tempe, AZ 85287
United States
Michael B. Clement (Contact Author)
University of Texas at Austin - Department of Accounting ( email )
2110 Speedway, Stop B6400
Austin, TX 78712
United States
512-471-0332 (Phone)
512-471-3904 (Fax)
Nathan Y. Sharp
Texas A&M University (TAMU) - Department of Accounting ( email )
430 Wehner
College Station, TX 77843-4353
United States
979-845-0338 (Phone)

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