Analysts Independence Essay

Analysts’ independence is where stock/security analysts are required to conduct themselves in an impartial manner. Analysts’ are called upon to resist undue influence from clients and their respective companies so as not to compromise the credibility of their research and the professionalism of their work. They may sell all their researches on payment, in order for them to be considered as “independent”. Analysts may be employed based on different cases. Some are employed by research houses while others are may be employed in order to deliver research to their investors’ institutions, and such analysts are also referred to as “buy side analysts.” A comprehensive, insightful and independent analysis should help investors evaluate the integrity of sell side research and help regulators adopt wise policies.
Analysts’ independence can be compromised when they are required to show the results of their research to the “sell side” first before reporting the same to the “buy side.” Now, given that the “sell side” is mostly the one that pays for research, the analyst will be under pressure to change recommendations or risk being penalized. This effectively compromises the analyst’s objectivity and independence. Maintaining a “buy” recommendation on a stock after its price has fallen is one such evidence that an analyst’s independence is compromised. This is common for analysts who recommend investing in tech stocks and the broader stock market.
Peter Houghton’s memo states that both the company and the client banker need to be notified in advance of any recommendation change to be made. The memo goes on to say that if the company requests changes to the research note, the analyst has a responsibility to either incorporate the changes requested or communicate clearly why the changes cannot be made. Though the memo does not say that analysts should compromise their independence, it raises questions about analysts’ independence because the recommendations provided to the “buy side” are first shown to the company in question.
The “buy side” represents potential customers/investors who are the primary users of the research information obtained by analysts. The “sell side” represents the Wall Street securities firms. The “sell side” might be willing to make “sell” recommendations on stocks because of fear that it will hamper their chances of winning lucrative underwriting business from the client. If the “buy side” had its own team of analysts, it will still look at the recommendations of the “sell side.” But instead of taking those recommendations at face value, it will have its own team of analysts to confirm the earnings and scientific developments of the companies it invests in.
The “sell side” companies advocate for warning firms before their stocks are downgraded to ensure that there is clear flow of information between analysts and bankers and companies. This is a good business practice because there is fair disclosure of information for all the parties concerned. Analysts can advise investors to sell certain stocks by maintaining “buy” recommendations on these stocks despite their prices falling. The “sell side” will still sell the stocks due to the fall in price and the “buy side” will go on and buy on the analysts’ recommendation. An analyst can also advise an investor to sell stocks at a relatively lower sell limit order. This will attract potential buyers who will bid to buy the stocks at a lower price than its market value.