Sell recommendations by investment analysts working on Wall Street are still a rarity years after regulators and Congress imposed rules to clean up analyst fraud, and years after FINRA banned Jack Grubman of Citigroup and others who issued buy recommendations on technology stocks they privately considered to be “pigs,” in order to reap personal financial rewards for generating more lucrative investment banking business for their firms(“Analysis: Research “sell” notes decline as conflicts persist,” Reuters).
Today, worldwide, only 9 percent of analyst recommendations issued by investment banks and brokerage firms are “sell” recommendations. Data from Thomson Reuters shows that just 6 percent of the recommendations in the United States were “sell,” slightly more than the 3 percent level that persisted before and during the tech bubble, according to the article, citing a study published in the Journal of Accounting and Economics.
The percentage of sell recommendations dropped back down into the single digits after jumping to nearly 20 percent immediately after rules were imposed to eliminate the analysts’ conflict of interest. Despite “Chinese Walls” that were supposed to restrict communications between analysts and investment bankers, and despite rules prohibiting an analyst’s compensation from being tied to investment banking revenues, conflicts persist.
Analysts with negative views on stocks often keep those beliefs to themselves because of pressure from top bankers seeking business from the company or fear of being ostracized by senior executives.
“Research is associated, rightly or wrongly, with an organization and, if somebody puts out a sell recommendation people don’t like that,” David Baran, co-founder of Tokyo-based hedge fund, Symphony Financial Partners, was quoted as saying, adding: “In general it’s difficult for a lot of the analysts who could be negative or negatively biased on a company and expect to see them welcome at the next investor meeting or get access to the management.”
Thus, the message seems clear ? investors should be skeptical of financial analyst “buy” recommendations. They may be motivated by something other than prudent analysis.
Page Perry is an Atlanta-based law firm with over 170 years of collective experience maintaining integrity in the investment markets and protecting investor rights.