Financial analysts in the media: Evolving roles and recent trends
Jerome C Kuperman; Manoj Athavale; Alan Eisner
4,140 words
1 June 2003
American Business Review
74-80
Volume 21, Issue 2; ISSN: 0743-2348
English
Copyright (c) 2003 ProQuest Information and Learning. All rights reserved.
INTRODUCTION
Financial analysts have traditionally played two vital roles in
the financial markets. First, analyst monitoring positively impacts market
efficiency by reducing agency costs associated with separation of ownership and
management (Chung and Jo, 1996). Second, as conduits between public
corporations and investors, analysts improve market efficiency by providing
investors with the information necessary to make informed decisions (Moyer,
Chatfield and Sisneros, 1989).1 In their role as information intermediaries,
analysts increase investor cognizance of corporate performance and events that
affect stock prices. The extant empirical literature confirms that changes in
analysts' trading recommendations (Barber, Lehavy McNichols and Trueman, 2001;
Elton, Gruber, and Grossman, 1986; Ho and Harris, 1998) and/or analysts'
earnings estimates (Benesh and Peterson, 1986; Imhoff and Lobo, 1984; Stickel,
1991; Park and Stice, 2000) impact financial market valuations.
Historically, analysts worked 'behind-the-scenes' to provide
clients with investment analysis and advice - and accurate proprietary analysis
brought new clientele to the house for investment management services. This
paper proposes that the historical role of analysts as information providers
may not have changed, but the methods used by analysts to accomplish their job
have changed. In particular, we observe that recent changes in the media
scrutiny of financial markets has produced a shift in the approach of financial
analysts as they have moved, metaphorically speaking, from the shadows to the
spotlight. Anecdotally, analysts like Abbey Joseph Cohen, Elaine Garzarelli and
Ralph Acampora have gained celebrity-like status by appearing on television,
most prominently CNN and the CNBC financial network (Kurtz, 2000). A more
recent addition to the competitive fray is the Fox Financial News Network.
Clearly, cable television and the accompanying increase in dedicated financial
programming has had a dramatic affect on how investors get their financial
information. In the first quarter of 2001, the day end wrap-up shows for the
two major networks, CNN's Moneyline and CNBC's
In this paper, we review the literature to understand analyst
motivation in increasing their visibility in the media, test the hypothesis
that analyst visibility has been increasing over time in the print media
concurrent with the increased visibility apparent in television, and conclude
with a discussion focusing on the potential impact of increased analyst
visibility on the functioning of financial markets. For the purpose of this
paper, the Wall Street Journal (WSJ) which is widely recognized as the premier
financial daily and has been a source of information for innumerable event
studies is used as a proxy for the print media.
MOTIVATIONS FOR SEEKING VISIBILITY
Analysts have a substantial familiarity with their counterparts
including knowledge of their recommendations, earnings estimates, and research
reports. Analysts compare themselves to one another because their compensation
may be determined by that comparison. Olsen (1996) and Trueman (1994) argue
that this tendency for analysts to compare themselves with one another can lead
to risk-averse behavior as many analysts seek not to be wrong relative to other
analysts and that this risk-averse behavior causes 'herding' - the situation
where analysts' earnings estimates are more closely aligned with one another than
they are to the reported earnings. In describing herding behavior, Balog (1991:
49) observes that "the analyst doesn't want to be the last person to
discover something. It's okay to be embarrassed along with everybody else -
just don't be singularly embarrassed." However, as suggested by O'Brien
(1990), other more risk-seeking analysts will be rewarded by leading the herd
and possibly achieving the distinction of appearing in the lists of superior
performers compiled by Institutional Investor, Fortune and the WSJ. Visibility
in the media provides analysts with an opportunity to differentiate their
product, increase name recognition, obtain peer recognition, enhance their
status as opinion leaders, and market their work to institutional customers.
The impact of recommendations made by recognized superior performers has been
shown to have a significantly greater influence on market valuations than
recommendations by other analysts (Desai, Liang and Singh, 2000; Stickel,
1995.)
Analysts are motivated to help their employer attract new
customers. While recognizing the regulatory wall separating the investment
banking and brokerage functions within a firm, in practice it is not surprising
to see them working together towards a common goal. Rolfe and Troob (2000: 127)
observed that "during the underwriting process, bankers and analysts spend
a lot of time working closely with each other. They work out the details of a
company's valuation and debate what approaches should be used to position and
market the company to prospective buyers." Recent evidence also suggests
that investment banking firms have to compete harder than ever for new business
and high profile analysts with reputational capital are often pivotal in
securing such business (Elkind, 2001; Statman, 1999). High profile analysts can
also use their reputation to help attract investors in their employer's funds
and as brokerage trading customers.
Analysts are also motivated by the desire to enhance the post
recommendation performance of a security. Analysts obtain visibility in the
media when they provide a conduit for "event" information disclosed
by corporations by "framing" that information (Kahneman and Tversky
1982) and analyzing the impact of that information on market valuations, thus
influencing investor behavior (Raghubir and Das, 1999; Statman, 1999). Over
time, analysts may also add to the value of the corporation's reputation (Fombrun,
1996) which can add a valuation premium since people prefer to own the stock of
'admired companies' (Shefrin and Statman, 1995; Statman, 1995). Corporations
and analysts maintain this symbiotic relationship because, as noted by Statman
(1999: 25), "investors may regard security analysts as analysts, but
companies regard them as marketing channels for their stocks." Analysts
recognize their ability to 'market' firms to investors by increasing their
visibility in the media.
In summary, analysts have a variety of incentives encouraging them
to seek media exposure including of course, WSJ citations. Increased exposure
can do all of the following:
1. By making their views more widely known, analysts can move the
herd and become opinion leaders, thereby improving their relative performance
and their compensation.
2. By increasing their name recognition and by supporting a stock
publicly, analysts can help their firm attract new investors and more
investment banking business.
3. By supporting a stock publicly, analysts are better able to
promote stocks that they recommend to clients.
HYPOTHESES, DATA, METHODOLOGY, AND RESULTS
Data on analyst visibility in the media is collected from the WSJ,
which has long been recognized as a preeminent business publication and an
authoritative source of information and analytical business journalism. The WSJ
has also been used as a primary data source for innumerable "event"
studies documenting the reaction of security prices to company-specific
announcements or macro-economic events.
Specifically, we obtained data on analyst commentary appearing in
the WSJ for the years 1990 through 2001, on the strategic event of mergers and
acquisitions. The use of analyst commentary within published articles adds
value to the content of journalistic endeavors by providing an authoritative
analysis of the "event". Analytical commentary would be especially
valuable in the case of a strategic event like mergers and acquisitions - the
event is of importance to both the acquiring company and the acquired company,
to their competitors, to diverse stake holders, and of course to regulators if
regulatory approval is required. Mergers and acquisitions are also of special
importance because incumbent management of the acquired company may be hostile
to the attempt. In such a case, the synergistic benefits of mergers having
generally been illusory, the acquired stockholders appear to gain at the
expense of the acquiring stock holders - a phenomenon attributed to hubris on
the part of the acquiring management.2 We would therefore expect the WSJ to
incorporate analyst commentary into such articles.
H1: WSJ articles (with word count greater than 100) covering the
strategic issue of mergers and acquisitions will increasingly incorporate
analyst commentary within the articles.
It is important to remember at this point that WSJ coverage of a
specific event could be either a brief announcement or a longer article. Brief
announcements are unlikely to include analyst commentary, while longer articles
which are expected to include a comprehensive discussion of the event and
implications for market valuations might necessitate analyst commentary.
H2: WSJ articles (with word count greater than 250 words) covering
the strategic issue of mergers and acquisitions will incorporate more analyst
commentary in longer articles where detailed event analysis is desirable.
If it is true that the WSJ is incorporating more analyst
commentary and longer articles incorporate more analyst commentary, then it is
important to examine whether the number of longer articles in the WSJ is also
changing. This is necessary because if the WSJ is increasingly referencing
analysts in longer articles, and the number of longer articles is increasing,
then we can make the proposition that the total media exposure available to
analysts is also convincingly increasing. Thus, we consider the following
hypothesis regarding the length of articles in the WSJ.
H3: The number of longer WSJ articles (with word count greater
than 250 words) is increasing.
The sample data used in this analysis was obtained from Dow Jones
Interactive (found on the Factiva.com website). We were primarily interested in
identifying articles published in the WSJ during the month of March, June,
September, and December from 1990 to 2001 and catalogued under the subject
"mergers, acquisitions, and takeovers". We ignored shorter articles
which had a word count of less than or equal to 100 words in the text, which
are generally analogous to announcements, and are not expected to contain any
substantive analytical discussion. From the longer articles catalogued by Dow
Jones Interactive, we calculated the proportion that had referenced the
specific words 'analyst' and/or 'analysts' in the text. We also created a
sub-set of the data to include articles which met our criteria but which had a
word count of greater than 250 words. The hypothesis that analyst commentary is
constructive content should be more clearly reflected in this sub-set, and this
sub-set is expected to contain a greater proportion of articles referencing
analysts. The characteristics of each data set are presented in Table I. TABLE
I.The proportion of articles referencing analysts
While the data presented above clearly indicate that the
proportion of articles referencing analysts is significant, we also wanted to
examine the trend in the proportion of articles referencing analysts. We
therefore conducted an OLS regression analysis to examine the hypothesis that
in articles covering strategic issues like mergers and acquisitions, the WSJ
will increasingly seek to include analyst commentary. The dependant variable,
the proportion of articles referencing analysts, is regressed against a time
trend variable which has a value of 1 for March 1990, 2 for June 1990 etc. The
results of this analysis are presented in Chart I and Table II.
While the data presented above indicate that there is a
significant positive trend to the proportion of articles referencing analysts,
we also wanted to examine the trend in the publication of longer articles where
analysts are more likely to be referenced. We therefore conducted an OLS
regression analysis to examine the hypothesis that in articles covering
strategic issues like mergers and acquisitions, the WSJ will especially seek to
include analyst commentary in longer articles where detailed event analysis is
desirable. The dependent variable, the number of articles with word count
greater than 250 words, is regressed against the time trend variable which was
previously defined. The results of this analysis also indicate the presence of
a positive and significant trend (t-statistic=2.72, adjusted R^sup 2^=12%) in
the proportion of longer articles referencing analysts. We also examined the
data to check the incidence of longer articles published in the WSJ and found a
positive and significant trend (t-statistic=7.86, adjusted R^sup 2^=56%). The results
of this analysis are presented in Table II. CHART I.Time-trend in the
proportion of articles referencing analysts.TABLE II.Regression analysis of the
time-trend in the proportion of articles referencing analysts
These results suggest that a significant and increasing proportion
of articles reference analysts; and while it is the longer articles that are
more likely to reference analysts, the number of longer articles which are more
likely to reference analysts is also increasing.
IMPACT ON THE FUNCTIONING OF FINANCIAL MARKETS
As noted in the introduction, an acknowledged and important role
for analysts is as disseminators of unbiased information to investors otherwise
lacking such information. In a normative information-integration process, all
information would be rationally weighted based on its diagnostic value; and as
such analysts improve decision-making and enhance market efficiency. Following
this argument, the increased visibility of analysts will add to improved market
efficiencies. However, as noted by Raghubir and Das (1999), research on
decision-making in the psychology literature shows that this assumption is not
always accurate. Prior research (De Bondt, 1995; Shefrin, 2000; and Shiller,
1999) does suggest that well-documented momentum and overreaction effects may
in fact be related to behavioral phenomena such as framing and availability
biases. Chan, Karceski and Lakonishok (2000) tested three competing hypotheses
attempting to explain stock price appreciation from 1968 to 1996 and found that
a behavioral overreaction explanation, self-reinforcing market moves leading to
temporary overreactions, best predicted price movements. Shiller (2002: 22)
discusses this as a problem of 'attention cascades', noting the particular role
played by the news media (of which analysts are becoming increasingly a part)
in generating these cascades.
"The news media are, therefore, generators of attention
cascades - as one focus of attention in public thinking leads to a related but
slightly different focus, which leads, in turn, to yet another focus of
attention . . . stock market price increases generate news stories, which
generate further stories about new-era theories that explain the price
increases, which in turn, generate more news stories about the price
increases."
Central to behavioral arguments regarding framing and availability
biases is the well-accepted findings from psychology research that
decision-makers tend to overweight information that is both more recent and
more accessible (Kahneman and Tversky, 1976; Nisbett and Ross, 1980; Fiske and
Taylor, 1991). Fiske and Taylor (1991: 145) discuss two factors that appear to
be particularly relevant in the context of analyst commentary. The first
factor, 'early labeling', suggests that primacy is critical - information that
appears early is likely to have the greatest impact on how the event is
perceived. The second factor, 'accessibility', suggests the importance of
priming - recently and frequently activated ideas come to mind more easily than
ideas that have not been activated. By being more visible, analysts both prime
investors in regards to new information and improve the accessibility for all
information that they make available to investors. Essentially, the behavioral
argument follows that analyst comments can support the exaggeration of price
trends when they appear in the media, thereby increasing 'accessibility', while
'framing' information (sometimes in a biased manner) to support certain stocks.
Increased analyst visibility in the media is also relevant as we
consider "selective" disclosure regulation. It appears that at the
same time analyst opinion is being deemed increasingly important in the media;
their access to information necessary for analysis is being limited by regulation
like the Security and Exchange Commissions Regulation FD ('Fair Disclosure').
If corporations adopt a conservative stance in interpreting the prohibition on
selective disclosure or private communication of material, non-public
information, the quantity and quality of information that corporations make
available to analysts may decrease.3 Prior research has documented that
information asymmetry might hinder the working of financial markets (Stiglitz
and Weiss, 1981), while information production counters such market frictions
(Leland and Pyle, 1977; Campbell and Kracaw, 1980; Diamond, 1984). Prior
research has also documented the positive relation between the quality of
corporate investor relations and the consistency of earning forecasts
(Farragher, Kleiman and Bazaz, 1994; Lang And Lundholm, 1996) and the inverse
relation between greater disclosure and the cost of equity capital (Botosan,
2000). This situation poses an interesting conundrum for financial analysts and
research in financial markets. While analysts function to increase market
efficiency by analyzing and disseminating information to market participants,
and reducing information asymmetry; an unintended consequence of a reduction in
the quantity and quality of information available to analysts for incorporation
in earnings, valuation and recommendation models, is the possibility of
earnings surprises, an increase in market volatility and risk perceptions, and
a decrease in market valuations.
Dr. Jerome C. Kuperman is Assistant Professor of Management,
Dr. Manoj Athavale is Assistant Professor of Finance,
Dr. Alan Eisner is Associate Professor of Management,
Footnotes:
1 On the buy side, analysts and portfolio managers who work for
investment funds, banks and insurance companies and make investment
recommendations or decisions for their clients. On the sell side, brokerage
firm and investment bank employees provide earnings estimates and research
recommendations to investment managers and investors.
2 The choice of "mergers and acquisitions" was also
motivated by its general prominence as a research topic in both finance and
strategy related literature; its importance as a real-world strategic event
where analysts are likely to have opinions, and because it is discussed in Wall
Street Journal articles in sufficient volume to create a workable sample for
analysis.
3 A survey by the National Investor Relations Institute found that
54% of corporations expect to limit their communications with analysts. The
expected decline in the quantity and quality of communication was a factor in
the opposition to the adoption of Reg. FD by industry groups like the Security
Industry Association, Investment Company Institute, National Investor Relations
Institute and the Association for Investment Management and Research.
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