Most seasoned investors have long suspected that Wall Street research is compromised. Wall Street is not in the research business. Wall Street’s big banks are in the business of distributing securities. The “research” departments at banks are best viewed as branches of their marketing departments.
Sell recommendations are rare from the big brokerage houses because they are bad for business. Corporations don’t hire banks to issue stock or bonds if the bank has a sell rating on the company’s shares.
If you are still relying on Wall Street’s buy and sell recommendations to manage your portfolio, you are relying on advice that is more biased than you may realize. Jonathan Weil at Bloomberg View highlights a recent paper by three accounting professors that finds no difference in bias, accuracy, or performance of Wall Street research and research that is paid for by the companies being written about. To wit:
Now a new academic paper by three accounting professors has gone a step further. The authors studied a sample of 247 stock-research reports that were paid for by the companies being written about. They found the reports were just as reliable as comparable analyst reports issued by conventional brokerages. That’s saying something, considering the reputation of paid-for research shops as hired guns, hype artists and pump-and-dump promoters.
“We fail to find significant differences in the quality of paid-for analyst research relative to matched sell-side analyst research in terms of bias, accuracy, or ability to distinguish favorable from unfavorable future performance,” wrote Bruce Billings of Florida State University, William Buslepp of Texas Tech University and Ryan Huston of the University of South Florida.
The takeaway for investors is that there is no discernible difference between Wall Street Research and paid advertising. Hard to believe, is it not?
Jeremy Jones, CFA
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