Inside the 'Black Box' of Sell-Side Financial Analysts
Lawrence D. Brown
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
October 30, 2013
The objective of this study is to penetrate the “black box” of sell-side financial analysts by providing new insights into the incentives analysts face and the inputs they use to make their decisions. We survey 365 sell-side analysts and conduct 18 detailed follow-up interviews covering a wide range of topics. Our key findings include: (i) analysts frequently communicate directly with management, and their private phone conversations with management are especially valuable to them; (ii) generating underwriting business or trading commissions is important for their compensation; (iii) broker votes are very important for their career advancement, much more important than Institutional Investor All-Star status; and (iv) their industry knowledge is very important for their compensation, as an input to their earnings forecasts, and as an input to their stock recommendations. We also conduct cross-sectional analyses that highlight the impact of analyst characteristics (e.g., gender, education, award status) and brokerage characteristics (e.g., size, client focus) on analyst responses. Our findings are relevant to investors, managers, analysts, and academic researchers.
Number of Pages in PDF File: 70
Keywords: sell-side analysts, analyst inputs, analyst incentives, private communication, analyst compensation, industry knowledge
JEL Classification: M40, G24, G28working papers series
Date posted: March 4, 2013 ; Last revised: October 30, 2013
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