Inside the 'Black Box' of Sell-Side Financial Analysts
Lawrence D. Brown
Temple University; 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
The objective of this study 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 they 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 management earnings guidance, earnings conference calls, and the recent 10-K or 10-Q report. Another notable finding is that analysts are incentivized to issue earnings forecasts and stock recommendations below the consensus because it increases their credibility with investing clients. Further, 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, G28working papers series
Date posted: March 4, 2013 ; Last revised: March 26, 2014
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