An Analyst's Actual Impact

Don’t show your bias or slack off in your reports if you’re an analyst at an investment bank and want to move up in your career, finds new research from the University of Maryland’s Robert H. Smith School of Business. The research, from visiting finance professor Oya Altinkiliç, finds that analysts who issue negligent reports – characterized as overly optimistic or too bold with recommendations, or those that simply piggyback on earlier reports or corporate news – jeopardize their careers.

“We find analysts issuing negligent reports are less likely to be promoted and they are more likely to move down,” says Altinkiliç. “We also find that top banks, which have a higher reputation capital to protect, punish such analysts more than other banks.”

Securities analysts at investment banks have long been seen as critical players in capital markets for the reports they issue. The reports provide recommendations to buy, sell or hold particular securities, or offer predictions when forecasting company’s earnings. But Altinkiliç’s previous research contradicts the idea that analysts actually move markets. She and her co-authors found that most of those reports – up to 98 percent – simply piggyback on corporate news and don’t offer new information. “We don’t find that analysts actually move the prices of securities when they issue reports.”

Altinkiliç’s new research looks at how the reports impact the career outcomes for analysts, who are most often employed by investment banks. The banks monitor the analysts because the analysts put their bank’s reputation on the line when they issue recommendations and make earnings forecasts.

“They have always cared. If you are hiring investment analysts in-house, and your bank’s name is associated with their reports, you are going to monitor that employee,” says Altinkiliç. But this research is the first to look at that monitoring and the bonding effect of reputation. The labor market for analysts is very competitive, she says, with an average turnover rate of 20-25 percent each year. The research reveals some of that is because investment banks are disciplining their analysts for negligent reports.

“From an academic research point of view, this is a relatively controversial result,” says Altinkiliç. “Analysts, still to this day, are being seen as movers of the market. When they say something, the market follows. They can impact prices of a firm up 3 to 4 percent every time they issue a report. That idea has been on the table since 1980, and there have been several hundred papers in top journals based on the idea that analysts are informative and that their careers flourish based on their reports.”

“We don’t find that,” says Altinkiliç. “We find that if they use these attributes – being too optimistic, being bold, following news – these are actually seen especially by top banks as negative attributes and they punish the analysts for that.”

The researchers also looked at analysts with institutional investor awards to identify star analysts, but these award-winners represent such a small portion of analysts, that they offer too little reputation power for the typical analyst. In each industry, only one or two analysts are given that award each year out of more than 4,000, says Altinkiliç, so the awards don’t offer a good measure of reputation for most analysts.

Altinkiliç says the research shows the big picture view that capital markets are highly competitive and, through the monitoring and bonding by the investment bank intermediaries, are keeping tabs on analysts: “Negligent analysts do not survive in these markets. They either move down, or they move out altogether.”

Read more: Investment Bank Monitoring and Bonding of Security Analysts' Research is featured in the Journal of Accounting and Economics.