Analysts' Research Reports, Factors & Effect on Investors Decisions (Essay Sample)
A Study of Financial Analysts: Practice and Theory
Author(s): Stanley B. Block
Source: Financial Analysts Journal , Jul. - Aug., 1999, Vol. 55, No. 4 (Jul. - Aug., 1999),
Published by: Taylor & Francis, Ltd.
Stable URL: https://www.jstor.org/stable/4480185
SYNOPSIS: Sell-side analysts have been the subject of hundreds of academic studies.
In this paper, I offer perspectives on the state of our understanding of analysts based on
prior academic research. Additionally, several observations are offered, which question
how descriptive certain widely held beliefs are in light of the evidence. These
observations on the literature serve as both criticisms and suggestions for future research.
Data Availability: Data used in this paper came from publicly available sources.
FINANCIAL ANALYSIS AND EQUITY EVALUATION
CHARACTERISTICS OF ANALYSTS’ RESEARCH REPORTS, FACTORS AFFECTING THEM AND EFFECT ON INVESTORS DECISIONS
In the recent past, there has been growing attention on the sell-side analyst, factors that influence their role and effect of the factors on their analyst accuracy (Bradshaw, 2011). Over the past decades, understanding on the role of the analyst has grown. Their work has highly been relied upon by investors who have no time and do not clearly understand markets (Agrawal and Chen, 2008). Hence making the analyst work a very crucial piece of information for decision making.
Regulators have high dependency on market information flow. Thus making analyst a very important source of information flows. There have been classified into three major categories including; buy-side, sell-side, and independent analyst. Their work is characterised by a wide range of factors which will lay a basis for the current analyses (Mehran and Stulz, 2007). Besides, these characteristics that are fundamental to analyst work have an influence on the investor’s decisions as will be discussed in the current analyses. One of the major issues in analyst work has been conflict of interest that has characterised their work. This has influenced investor’s decisions and has impacted on the overall portfolio management strategies (Mehran and Stulz, 2007). The current analyses will link the characteristics to the decisions made by investors.
Characteristics of analyst work
There are many consideration made by analysts in order to be able to make their analyses. Thus, the analyst work is influenced by a wide range of factors including; the company strategy, accounting policies, historical performance, future prospects, and valuations recommendations (Ljungqvist et.al, 2007).
The analyst is affected by a wide range of factors that influence information gathering, analysis and communication including; analyst ability, incentives, integrity, responsiveness to clients, and behavioural factors (FIRMS, 1998).
The analyst work is characterised by forecasts which are optimistic. Researchers have argued that most results have been optimistic, with high forecasts (Bradshaw, 2011). This kind of selection bias affect the accuracy of the work presented by analyst as high forecast have a negative effect on prices (Bradshaw, 2011). Thus, the recommendations become optimistically biased. As such, they would influence the investor’s decisions. This kind of bias has a positive drift and lead to high forecast error.
Second, the analyst work is superior to time series model forecasts. This means that the forecasts are made objective as well as more accurate. Thus, they are able to provide better estimates compared to use of other models (Block, 1999). As compared to time series models, they rely on timing and information which make analysts have better estimates.
The analyst forecast are inefficient. This is so because, over the past decades, analyst reports have been said to be efficient if they accommodate all information that is available to the analysts (FIRMS, 1998). However, in most cases, all information is not included due to conflicts of interest and relationships with managers which has led to inefficient analyst work. The analysts in most cases underreact or overreact to information that are ex ante to their recommendation.
There has been a lot of multi-tasking in analysts work. A lot of researchers have argued that most people believe that analyst are out to making accurate forecast. However, analyst work has more than that (FIRMS, 1998). Thus, making forecasts has been part of their work but has more involvements which make their analytical work more comprehensive. Projections and risk rating has been some of other activities that are performed by the analysts and that help improve the analysts work (Brown et.al, 2015).
However, the analyst work is dominated by conflict of interest. This has been from investment banking fees, favour with management, incentives, investor relationship, and research of hire, and among the analyst themselves (Bradshaw, 2011). These different sources of conflict of interest has an effect on the recommendations provided by the analysts. Consequently, affecting the outcomes.
Analysts work is limited in application. There has been a lot of research that has proposed that most people are not aware of what exactly analyst reported are meant to do. Although there are proposals of consistent results, there has not been much application. Thus, has not widely been applied in practice (Block, 1999). In addition, there is no clear guide as to how the work is forecasted. Besides, the thought that people know how forecasting is done has widely characterised analyst work as well as recommendations provided. These has affected the actual decision on how analysts actually conduct their work (Groysberg et.al, 2011). There has been limited information on what analyst do and the importance of analyst work. This has led to little reliance on the information provided by the analyst.
Analyst work has been surrounded by use of traditional methodologies. This has led to subjectivity as well as overestimated forecast. Although this has been changing in the recent decades, there has been a vast effect on economic decisions made. However, it the recent past, it has been made more cohesive which will ultimately impact on the recommendations provided (Block, 1999).
Analyst work has been under reviewed in literature. Thus, little is known with regards to the results that are provided by the analysts as well as use of information. This has led to misconception and relations on the accuracy of the analysts work (Bradshaw et.al, 2013). There has been a lot of questions asked with regards to their recommendations. This has led to limited use of their information as well as little reliance for decision making. The analyst work is characterised with indirect usefulness. Thus, their work is not seen as one for direct consumption in examining the capital markets.
2B) effect on investor’s decision
The analyst’s decision is very useful to investors. For instance, the firm managers rely on the analyst report to make strategic investment decisions. Investors with limited time to make individual analysis, highly depend on analyst decision (Bradshaw et.al, 2012). They are major economic agents that are very useful to investors and thus information they provide is very important. Most investors rely on the work of analysts, as well as need the analyst analysis to be able to enumerate the data that has been processed. Thus, the recommendations of the analyst play a great role in understanding what the managers need, and how they use the information provided to them.
The analysts finishes their report with a purchase or sale recommendation, thus the firms highly rely on their information to make strategic decisions, since it is assumed that they will have relied on the different factors to arrive at a plausible decision (Block, 1999). The analysts work is heavily relied on and enumerates how financial information is synthesised and interpreted by the investors as they heavily rely on the work of investors to make decisions (Bradshaw, 2011). Effect of optimism is that the forecasts are at times very high and thus investors relying on the analyst report may overestimate the analysis and thus end up making wrong decisions.
Some researchers have argued that analysts under react to information and thus their recommendations are inefficient. In addition, they have been forced to have optimistic decisions since they want to maintain interactions with the management (FIRMS, 1998). Forecast error have a deep negative effect on price shocks which could have a deepening impact on a company. The analysts due to conflicts of interest between the firm and the true evidence, they are reluctant to provide negative recommendation. Thus, the effect of selection bias highly affects investor’s decisions (Bradshaw, 2011).
The fact that the analyst work has been modelled compared to use of other models like time series modes, the investors are offered with more accurate estimates which they can rely on. Thus, their decisions are more objective. The investors relying on the analyst work are able to have efficient decision (Block, 1999). Reliance on the piece of information, the investors are able to make objective decisions since the analyst have a time and information advantage.
Having inefficient forecasts has led to decisions that are biased by the investors. This is because analysts have in the past decades failed to make use of all information available to them. As a result, this has led to recommendations that are biased and having a biased investor’s reaction. Thus having over and under reaction to information, analysts work become inefficient which has an effect on the decisions that are made by investors since they rely on the reports to make decisions (Block, 1999). Consequently, leading to inefficient use of information.
Having multi-tasking as the core goal of analysts, they are able to provide a wide coverage of information that investor can rely on. As a result making investors decisions more comprehensive and consolidated (Bradshaw, 2011). Forecasts and rating are an important source of information for use by investors. Thus, investors are able to be more precise in their analyses and understanding of the market, as well as what they want. The investors are also able to relate how forecasts are related to the projections made and the kind of ri...
- Financial ratios of Hilton and Marriott years 2016, 2017, and 2018Description: Company performance is depicted by its key performance indicators. One of the most indicative and influential way of measuring performance in a firm is the use of ratio analysis to estimate the level of liquidity, efficiency, growth, margins, profitability, performance, valuation and gearing level (Garrett,...5 pages/≈1375 words| 8 Sources | APA | Accounting, Finance, SPSS | Essay |
- Treatment of Deferred-Tax as Asset, Liability & AccountingDescription: A deferred tax assets in an asset to the balance sheet that was overpaid by a firm. On the other had a liability represent what a company has not paid but ought to have paid (Laux, 2013). As an asset, would select rest as the company had made a pre-payment. Interest expense is a liability to the firm and ...2 pages/≈550 words| 2 Sources | APA | Accounting, Finance, SPSS | Essay |
- Principles of Financial InvestmentDescription: Time value of money is a concept that explains the sum of money is more worth now than the sum that it will be at a future date due to the earnings potentials in the interim. Concept of Time value of money explains that sum of money in the ...4 pages/≈1100 words| 5 Sources | APA | Accounting, Finance, SPSS | Essay |