Can Sell-side Analysts Compete Using Public Information? Analysts as Frame-makers Revisited

Abstract

This paper extends qualitative research on sell-side analysts by investigating how analysts compete against each other in the market for investment advice. The paper challenges the assumption that analysts must utilize private information in such competition, and investigates the role of a public setting -the quarterly earnings presentation -for analysts' analytical work and client communication. The paper draws on an in-depth field study, comprising observations and interviews, and theorizes analysts as framemakers when analyzing the materials. The study reveals how accounting reports place assumptions within the valuation practices of the share into question and risk 'overflowing' established calculative frames.The analysts utilized such uncertainty to enhance their dialogues with both clients and managers. Reacting to public information, therefore, served a central role for analysts' competition, whereas proactively developing investment cases and acquiring private information were of less importance. These findings are discussed against recent developments of the sell-side industry's remuneration models, and it is argued that experience has become an increasingly valuable quality. The paper also contributes to the perspective of analysts as frame-makers by shifting attention to overflows and how calculative frames develop through so-called 'cold' negotiations.

Throwing in the towel: What happens when analysts' recommendations go wrong?

“…An interesting question is whether the relational role of an analyst report becomes more or less important in certain circumstances, such as when an analyst gives up on an important stock recommendation. We suggest that the specific dynamics in place in such circumstances represent an interesting empirical gap or "blind spot" (Graaf, 2021) in the qualitative analyst literature and so warrant further investigation. This study also responds to calls for more research that examines the interactions and social structures underpinning the work of analysts (Imam & Spence, 2016;Lee & Manochin, 2021), extending the empirical evidence collection beyond the sell-side and buy-side to include corporates and equity-sales teams.…”

“…Although most research on analyst recommendations focuses on the success or otherwise of these outputs, other streams of research pivot toward understanding analyst practices by exploiting theoretical concepts and frameworks from sociology (Chen et al, 2018; Fogarty & Rogers, 2005; Graaf, 2018, 2021; Imam & Spence, 2016; Lee & Manochin, 2021; Leins, 2018; Spence et al, 2019; Stolowy et al, 2022; Tan, 2014). This research stream privileges the study of economic actors and their interactions and experiences to enrich our understanding of capital markets (Knorr‐Cetina & Preda, 2012).…”

“…They argue persuasively that analysts require both social skills and technical expertise to be successful and suggest that reports, such as those containing stock recommendations, fulfill an important function as promotional or legitimacy devices to help analysts gain access to clients. Other qualitative studies have supported the characterization of analysts' outputs as "consensus forming" rather than acting as specific investment instruction (Barker, 1998;Graaf, 2021;Imam & Spence, 2016). Our study focuses on recommendation capitulations, so we are particularly interested in the literature on recommendation changes, often referred to as revisions, which is reflected in the literature synthesis below.…”

“…To address these issues requires looking beyond classic economic models; so, one stream of the literature amplifies the importance of the social dimension to analysts' practices, seeing recommendations as relational or legitimacy devices, tools of narrative authority, and mechanisms for establishing market consensus. That body of literature has addressed a wide range of research questions, such as whether analysts can compete effectively using only public information (Graaf, 2021), the information intermediary role of the sell-side (Chen et al, 2018), analysts' interactions with equity-sales teams (Lee & Manochin, 2021), the role of narrative authority as a component of analyst work (Leins, 2018(Leins, , 2022, and interactions between analysts and activist short-sellers (Stolowy et al, 2022).…”

Female analysts and COVID-19 corporate donation

“…However, such a 'formal information channel' is often less valued in the information contexts of analysts. Subsequently, private information is needed to enhance the accuracy of their forecast (Graaf, 2021). To access private information, analysts may have private conversations with management via phone calls with the CEOs or CFOs (Brown et al, 2015), or corporate site visits (Cheng et al 2016).…”