Earning the “Write to Speak”: Sell‐Side Analysts and Their Struggle to Be Heard

Abstract

This paper explores the ways in which sell‐side (SS) financial analysts seek to position themselves advantageously within the wider field of investment advice in spite of widespread skepticism over the value that their forecasts and recommendations add to investment decisions. The field of investment advice has been characterized in recent years by a number of regulatory and technological changes that have forced SS analysts to reconstitute the ways in which they influence the investment decisions of buy‐side (BS) actors. Faced with existential threats, SS analysts have responded to the disruptive impact of technology and regulation by struggling hard to ensure that their services are still valued by fund managers. Key to this ongoing process is the recalibration of professional expertise, which previous research has alluded to but not explored in detail. Central to the persistence of SS analysts in processes of investment decision making are activities revolving around the production and use of analyst reports which, our findings indicate, are less valuable for their informational content than their role as “relational devices,” ascribing legitimacy to SS analysts and earning them an entry ticket to more substantive, value‐adding interactions with companies and BS actors. We also show that economic considerations in the area of investment advice are influenced by social ties, the motivations of various actors in the field, and their relative position vis‐à‐vis other actors. More generally, we contribute to the literature on professional projects by showing how professional groups are constantly engaged in attempts to reposition themselves in the social space, but that field‐level changes can restrict the outcomes of these strategies to mitigation rather than advancement for the professionals concerned.

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

“…investment banks) and are specialized to analyze a select few shares. Their primary organizational function is to serve buy-side fund managers with investment advice, both through published investment reports and a more continuous informal dialogue (Groysberg & Healy, 2013;Spence et al, 2019). Several studies have now answered calls to unpack the 'black-box' of analysts' situated practices (Ramnath et al, 2008), and having done so, their conclusions criticized the 'presumption (sometimes explicit, often implicit) that the primary function of analysts is to provide [investment] recommendations' (Imam & Spence, 2016, p. 229).…”

“…earnings forecasts and target prices, Bradshaw, 2009;Ramnath et al, 2008), the qualitative literature has theorized analysts in a role which collectively can be labeled clients' 'valuation benchmarks' (Barker, 1998;also Imam & Spence, 2016). The argument is that analysts' investment reports act foremost as 'relational devices' to facilitate the analyst-client dialogue (Spence et al, 2019). In such dialogues, clients neither ask for valuations (Imam & Spence, 2016) nor forecasts (Hägglund, 2000) but instead ask for the underlying assumptions in the current valuation of the share (also Blomberg et al, 2012).…”

“…Sell-side analysts (hereafter referred to as analysts) are a frequently targeted user group in accounting research (Bradshaw, 2009;Ramnath et al, 2008;Wansleben, 2012). In the qualitative literature, analysts are typically theorized as fund managers' 'valuation benchmarks' (Barker, 1998, p. 16); that is, they are theorized as advisors who foremost provide investors with rich, contextual information about the firms' current situation and valuation (Hägglund, 2000;Imam & Spence, 2016;Spence et al, 2019). Such a role answers concerns regarding the reportedly low accuracy in analysts' recommendations (Bradshaw, 2009;Salzedo et al, 2016) because precision in forecasting is then neither required nor requested by clients (Hägglund, 2000;Imam & Spence, 2016).…”

“…Such a role answers concerns regarding the reportedly low accuracy in analysts' recommendations (Bradshaw, 2009;Salzedo et al, 2016) because precision in forecasting is then neither required nor requested by clients (Hägglund, 2000;Imam & Spence, 2016). Instead, the general idea is that the analyst community aids investors by establishing the 'consensus expectations' of the market (Barker, 1998;Imam & Spence, 2016) and by legitimizing and rationalizing fund managers' investment decisions (Fogarty & Rogers, 2005;O'Barr & Conley, 1992;Spence et al, 2019;Taffler et al, 2017).…”

“…The 'valuation benchmark'-proposition has, thus, foregrounded investors' appreciation of analysts collectively and de-emphasized the particular advice of individual analysts. However, this raises new questions concerning how analysts compete with other (sell-side) analysts (Spence et al, 2019) and how some analysts reach a position as 'leaders' within their industry (Barker, 1998, p. 7). Analysts from competing sell-side firms analyze the same shares and largely serve the same clients without any explicit right to compensation (Groysberg & Healy, 2013).…”