As the old saying goes, 'There are three types of lies: lies, damn lies and statistics.' So take at least a couple of grains of salt when you read statistics about sell-side analysts.
As the old saying goes, 'There are three types of lies: lies, damn lies and statistics.' So take at least a couple of grains of salt when you read statistics about sell-side analysts.
Nearly 70 percent of the sell-side respondents in a recent survey say there is a difference between what they write and what they tell investors verbally. A whopping 80 percent of the buy-side respondents also note this inconsistency. These statistics themselves are not surprising, however. On the contrary, most people assume there is a contrast between what analysts write and what they say, and by the same token most people treat sell-side research with a high degree of skepticism.
Credibility is a key issue, and it has been underscored by the Enron disaster. Did the sell-side analysts not know that Enron was a sham, or did they know and choose not to tell? Many people suspect the latter.
The SEC, the National Association of Securities Dealers and others are looking at a body of new rules to govern analysts. The message is clear: the sell side must be policed more closely. Why? Because that is the only way to ensure analysts give a semblance of objectivity.
At the same time, research analysts - at least the good ones - tend to know the industry they cover better than anyone else in their firm, and they often build very close ties with the various industry players. Perhaps more than anyone, the sell side is in the best position to facilitate meetings between public companies and investors.
In the aforementioned survey, a quarter of the fund managers say the sell side's job is to provide trend overviews, and the same number say analysts function as champions for companies they like.
But are they helping companies to the best of their ability? The classic criticism is that sell-side firms only set up meetings with their clients, and their clients may not be those investors best suited to visiting companies. The big questions are how could the sell side do more, and what would it take to bring about this change? If you think the answers are cut-and-dried, you may think differently by the time you get through our cover story.