Research under the Microscope
Field, Graham, Global Finance
Analysts are coming under analysis, and it can be a disconcerting experience.
The equity analysts' job has become a great deal ougher in the past three years. A sustained bear narket has meant pressures from all sides: within investment banks it has been a story of remorseless cost cutting, redundancies and slashed bonuses. From outside, disgruntled investors and zealous regulators have been gunning (sometimes quite literally) for the analysts. Now comes another-at times unwelcome-pressure: the scrutiny of research by third parties.
In the past, analysts were seldom held accountable for their forecasts and recommendations. Now, it is standard practice for all research distributed in the US to carry charts showing the history of an analyst's recommendations and the corresponding movements in the share price. A central database is to be set up in the US to track these as part of the 'global' research settlement initiated by New York Attorney Eliot Spitzer's investigations.
Private companies are already providing some of this service. London-based AQ (Accuracy Quotient) has been tracking analysts' earnings per share (eps) forecasts since 1998, using raw data from Thomson Financial, the biggest provider of earnings estimate data. The ability to predict company eps accurately is, we have maintained, one sign of an analyst's understanding of a company's fundamentals.
For investors, however, an analyst's ability to pinpoint an eps number to the third decimal place is not always as useful as knowing whether a buy, hold or sell recommendation was right or not. Spitzer's investigations revealed a clear bias toward positive recommendations-a pattern that UK regulator the Financial Services Authority argues is mirrored in the market it oversees. That's pushed analysts' recommendations to center stage in the quest for independent research. …