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The Stock Selection and Performance of Buy-Side Analysts

Management Science, 59 (5): 1062-1075

36 Pages Posted: 18 Jul 2010 Last revised: 3 Feb 2014

Boris Groysberg

Harvard Business School

Paul M. Healy

Harvard Business School; National Bureau of Economic Research (NBER)

George Serafeim

Harvard University - Harvard Business School

Devin M. Shanthikumar

University of California, Irvine - Paul Merage School of Business

Date Written: July 17, 2012

Abstract

Prior research on equity analysts focuses almost exclusively on those employed by sell-side investment banks and brokerage houses. Yet investment firms undertake their own buy-side research and their analysts face different stock selection and recommendation incentives than their sell-side peers. We examine the selection and performance of stocks recommended by analysts at a large investment firm relative to those of sell-side analysts from mid-1997 to 2004. We find that the buy-side firm’s analysts issue less optimistic recommendations for stocks with larger market capitalizations and lower return volatility than their sell-side peers, consistent with their facing fewer conflicts of interest and having a preference for liquid stocks. Tests with no controls for these effects indicate that annualized buy-side Strong Buy/Buy recommendations underperform those for sell-side peers by 5.9% using market-adjusted returns and by 3.8% using four-factor model abnormal returns. However, these findings are driven by differences in the stocks recommended and their market capitalization. After controlling for these selection effects, we find no difference in the performance of the buy- and sell-side analysts’ Strong Buy/Buy recommendations.

Keywords: Buy-Side Analysts, Sell-Side Analysts, Stock Recommendations, Recommendation Optimism, Recommendation Performance

JEL Classification: M41, G14, G29

Suggested Citation

Groysberg, Boris and Healy, Paul M. and Serafeim, George and Shanthikumar, Devin M., The Stock Selection and Performance of Buy-Side Analysts (July 17, 2012). Management Science, 59 (5): 1062-1075. Available at SSRN: https://ssrn.com/abstract=1644782 or http://dx.doi.org/10.2139/ssrn.1644782

Boris Groysberg

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-496-2784 (Phone)
617-496-5271 (Fax)

Paul M. Healy

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Harvard Business School ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-1283 (Phone)
617-496-7387 (Fax)

George Serafeim (Contact Author)

Harvard University - Harvard Business School ( email )

381 Morgan Hall
Boston, MA 02163
United States

HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=15705

Devin M. Shanthikumar

University of California, Irvine - Paul Merage School of Business ( email )

Paul Merage School of Business
SB 440
Irvine, CA 92697-3125
United States

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