What is the Value of Analyst Research?

47 Pages Posted: 23 Jun 2019

See all articles by Sreedhar T. Bharath

Sreedhar T. Bharath

Arizona State University (ASU) - Finance Department

Stefano Bonini

Stevens Institute of Technology - School of Business

Date Written: June 17, 2019

Abstract

We estimate the value of equity analyst research motivated by regulatory changes such as MIFID II, which unbundles equity research and trading functions. We find that changes in target prices (CTPs) of equity analysts even as early as 120 days before a rating change can accurately predict actual credit rating changes of all rating agencies in the United States and Europe, even during a financial crisis. The accuracy of CTPs as a predictor of credit rating actions is as high as 78% even after controlling for actual stock price changes in predicting these rating actions, and this finding is robust to outlook and watch-list effects. For our sample of firms that had a credit event, we estimate the value of analyst research on average to be about 15.5 billion $ for a downgrade and about 5.2 billion $ for an upgrade. Unconditionally, we estimate the value of analyst research to be about 1.8 billion $ when the CTP predicts a future decline in stock prices and about 1.1 billion $ when the CTP predicts a future increase in stock prices. We conclude that the economic value of analyst research is indeed sizable, contrary to the conclusions of most of the extant literature.

Keywords: MiFID II, Analysts, Credit Rating

JEL Classification: G21, G34, M40

Suggested Citation

Bharath, Sreedhar T. and Bonini, Stefano, What is the Value of Analyst Research? (June 17, 2019). Available at SSRN: https://ssrn.com/abstract=3405673 or http://dx.doi.org/10.2139/ssrn.3405673

Sreedhar T. Bharath (Contact Author)

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Stefano Bonini

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

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