A Glimpse Behind a Closed Door: The Long-Term Value of Buy-Side Research and its Effect on Fund Trades and Performance
37 Pages Posted: 15 Mar 2012 Last revised: 17 Mar 2012
Date Written: March 14, 2012
We examine proprietary research produced by buy-side analysts working for a large fund management company. Their primary research output is an estimate of the expected abnormal return (buy-side alpha) for each stock they cover. We find that the level and the change of buy-side alphas contain information about abnormal returns in the following four quarters. Moreover, their investment value is greater for stocks that are more difficult to value. We also find that trades made by portfolio managers working for the company are highly sensitive to changes in buy-side alphas. Although fund trades are also influenced by sell-side recommendation changes, this influence is mainly concentrated in stocks without buy-side alpha estimates and in fund portfolios with low overall buy-side coverage. Finally, fund performance improves with reliance on buy-side research.
Keywords: Mutual funds, analysts, fund performance
JEL Classification: G11, G14, G23
Suggested Citation: Suggested Citation