Apparently FINRA is looking into whether sell-side research analysts are doing some naughty things, which is an evergreen topic, though you might almost imagine that the current round is being prompted by the return to public life of Eliot Spitzer, who gets a quote in the DealBook article. Eliot Spitzer: not a fan of research-analyst naughtiness.
It’s hard to tell if the analysts are doing naughty things but, probably, right? Basically the analysts are meeting with potential issuers before those issuers’ IPOs, which is fine. But at those meetings, which tend to be arranged by “so-called I.P.O. advisers” like Solebury, Rothschild or Lazard,1 they might be talking about the IPO and the analysts’ views of the issuers, which is not fine. They’re “supposed to discuss only broad industry trends at these meetings” and defer to their bankers for “specific views on a company, like earnings models or potential I.P.O. pricing,” because the idea is that the analyst meetings are not supposed to be used by the issuers to select underwriters. They’re just a chat! It’s like, hey, I’m in this industry, you cover this industry, let’s talk about broad industry trends! For my general education! Because while, yes, me and my IPO advisers sitting next to me are picking underwriters for our IPO, and while your bankers are pitching us “within hours” of this meeting, right now I’m entirely focused on a general chat about broad industry trends. That’s all this is. Read more »
Here’s sort of a pleasing paper on equity research analysts. The background is basically that there’s this constellation of questions that reduce to “do public markets make companies Bad?,” and one of the main mechanisms by which that might happen would be if markets make companies focus on short-term earnings and shareholder distributions rather than long-term value creation for all stakeholders through sustainable innovation. So you try to find ways to measure (1) how public a company is and (2) how innovative it is, more or less, and then see how they interact. Analyst coverage is sort of a proxy for, like, intensity of public-ness,1 while patents are sort of a proxy for innovation.2 So does more research coverage make companies more or less innovative?
In terms of economic significance, our analysis suggests that an exogenous average loss of one analyst following a firm causes it to generate 18.2% more patents over a three-year window than a similar firm without any decrease in analyst coverage.
Citi today fired Mark Mahaney, its internet analyst, and was fined by Massachusetts securities regulators, for sending dumb emails to reporters. The Massachusetts consent order is here. Mahaney’s main misconduct1 is that on April 30 of this year a French reporter asked him about Google’s YouTube business:
Do you think that YouTube has been above your Total Net Revenue estimate 2011 ($876M)
Do you think that YouTube will be above your Total Net Revenue estimate 2012 ($1119m)
Do you think that they are largely profitable?
And Mahaney replied “Yes Yes Yes.” This was problematic because:
The information that [Mahaney] gave to the French Reporter had not been previously published. [He] had published a research report on Google, Inc. on March 21, 2012 and did not publish another research report until his interview with “All Things Digital” on June 21, 2012.
Two thought experiments. First, Mark Mahaney’s job was to drum up institutional business by producing actionable estimates and opinions about the stocks he covered. One way to do this is to publish research reports. Google, it is fair to say, is an important stock that he covered. He did not publish any research reports on Google for three months this year. What do you think he was doing during that time? Your choices are: Read more »
It’s not difficult to find cases of sell-side analysts recommending a stock at its peak, and then keeping the buy on all the way down to its bottom – at which point it becomes a sell. Josh Brown points out an egregious example and asks:
I have no idea how much brokerage firms pay analysts to cover stocks or whether or not the costs are really offset by revenues from institutional trading. I’m assuming that whatever they pay them, it is money well spent and they make more than enough in reciprocal brokerage profits – because how else to explain it otherwise?
Conveniently the Times this weekend answers both questions. Re: how much they’re paid, the answer is “more than a potted plant, anyway,” although the compensation packages do suggest that if they were really so good at picking stocks they’d do so on the buy side: Read more »
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