A Glimpse Behind a Closed Door: The Long-Term Investment Value of Buy-Side Research and its Effect on Fund Trades and Performance

Abstract

We examine proprietary research produced by buy-side analysts working for a large fund management company. We find that the buy-side research has investment value for a one-year horizon, and the analysts producing this research exhibit differential ability that tends to persist over time. The buy-side research strongly influences trades made by the company's funds, especially when it coveys information that is independent of the fund managers' own information, when it is produced by buy-side analysts with good track records, and when the underlying stocks have little sell-side coverage. The influence of sell-side research is concentrated primarily in stocks not followed by buy-side analysts and in funds with low overall buy-side coverage. The company's funds that rely more heavily on buy-side research generate superior performance.