Do Buy-Side Analysts Out-Perform the Sell-Side?

65 Pages Posted: 30 Sep 2005

See all articles by Boris Groysberg

Boris Groysberg

Harvard Business School

Paul M. Healy

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

Craig J. Chapman

Northwestern University - Kellogg School of Management

Devin M. Shanthikumar

University of California, Irvine - Paul Merage School of Business

Yang Gui

University of North Carolina (UNC) at Chapel Hill - Accounting Area

Date Written: March 2007

Abstract

We examine the performance of buy-side analysts relative to that of the sell-side. Our tests show that buy-side analysts at a large investment firm make less optimistic stock recommendations than sell-side analysts, consistent with their facing fewer conflicts of interest. However, their earnings forecasts are relatively optimistic and inaccurate and returns to their buy recommendations under-perform sell-side recommendations. Large sample tests that compare the performance of sell-side analyst recommendations and portfolio managers who rely exclusively on buy-side research confirm the sell-side's superiority. These performance differences appear to be partially explained by the buy-side's higher retention of poor-performing analysts and by differences in performance benchmarks used to evaluate buy- and sell-side analysts.

Keywords: buy-side analysts, sell-side analysts, analyst forecasts, stock recommendations, forecast optimism, forecast accuracy, recommendation optimism, recommendation performance

JEL Classification: M41, G14, G29

Suggested Citation

Groysberg, Boris and Healy, Paul M. and Chapman, Craig J. and Shanthikumar, Devin M. and Gui, Yang, Do Buy-Side Analysts Out-Perform the Sell-Side? (March 2007). Available at SSRN: https://ssrn.com/abstract=806264 or http://dx.doi.org/10.2139/ssrn.806264

Boris Groysberg (Contact Author)

Harvard Business School ( email )

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

Paul M. Healy

Harvard Business School ( email )

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

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Craig J. Chapman

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Jacobs Center 6227
Evanston, IL 60208
United States
8474912662 (Phone)
8474671202 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu

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

Yang Gui

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

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