Academic journal article International Journal of Management

The Usefulness of Financial Analysts' Reports: A Content Analysis

Academic journal article International Journal of Management

The Usefulness of Financial Analysts' Reports: A Content Analysis

Article excerpt

Financial analysts are considered to be an influential class of information intermediaries in capital markets given that stock market investors strongly rely on sell-side analysts' forecasts while forming their investment decisions. Given the influence exerted over investors' beliefs and activities, those reports should contain all the necessary information in order to provide reliable target prices and help investors to form expectations. Whereas other works test the reliability of target prices, this paper investigates whether the method and the parameters of the evaluation report are clearly disclosed and if the procedure undertaken for that is in accordance to the theoretical conventions provided by the Jenkins Report. Using content analysis, we explore and encode 73 reports of PSI20 listed companies, presenting empirical results regarding the distribution of categories of information. Subcategories included in Analyst Analysis account for 50% of all available information, while those of Financial Data and Management's Operational Data represent 13% and 10%, respectively, of information units contained in the overall analyzed reports. Empirical results allow us to infer that Portuguese sell side analysts reports are able to deliver the information reports users (or investors) need, evidencing that analysts' play a crucial role in financial markets because it is found here that they answer the main questions as required by "ideal reports" guidelines.


The market price of an asset is an estimate of its value independently on how markets are structured, where investors make assessments of the price based upon the expectations formed around assets future cash flows. To form these expectations investors need to use all information available although it can arrive in different forms. Analysts hold a privileged position in the market for information because they operate at the nexus of private and public information. On this basis analysts make earnings forecasts for the firms they follow, issuing buys and sell recommendations to their clients who follow it and trade on its basis. We can thus question: Do analysts provide all the necessary and required information to their clients?

To be able to make appropriate choices investors need relevant information in order to judge the opportunities and risks of the investments they want to make. Besides, well organized financial markets should promote well organized information and in this sense analysts' importance should be linked to the ability to issue clear information.

The centerpiece of analysts' reports is the recommendations made over stocks. These stock prices react to analysts recommendations when these are made because some investors really follow them (Clement and Tse, 2003). Womack (1996) examined the stock price response to buy and sell recommendations on the day of the recommendation and in the weeks following. The author finds that both buy and sell recommendations affect stock prices, but sell one's affect prices much more than buy recommendations, somehow expected given that buy recommendations outnumber sell recommendations.

Investors may need to spend a considerable amount of time collecting information because it was not reported in a consistent manner and is dispersed across a variety of corporate reporting media (Striukova et al., 2008). In this context, sell side1 analysts are an important source of information to investors (Savage, 1954). These work to brokerage houses or large investment banking firms, producing research reports that become available to their clients.

Sell side analysts conduct company research, searching and gathering financial and non financial information on a company from both private and public channels, analyze and interpret this information using models and heuristics, forecast firms future earnings, cash flows and growth rates, while also issuing reports on companies with a recommendation to buy, hold or sell the stock. …

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