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Publications
  • March 2015
  • Article
  • Journal of Accounting Research

Inside the “Black Box” of Sell-Side Financial Analysts

By: Lawrence D. Brown, Andrew C. Call, Michael B. Clement and Nathan Y. Sharp
  • | Pages:47
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Abstract

Our objective is to penetrate the “black box” of sell-side financial analysts by providing new insights into the inputs analysts use and the incentives they face. We survey 365 analysts and conduct 18 follow-up interviews covering a wide range of topics, including the inputs to analysts’ earnings forecasts and stock recommendations, the value of their industry knowledge, the determinants of their compensation, the career benefits of Institutional Investor All-Star status, and the factors they consider indicative of high-quality earnings. One important finding is that private communication with management is a more useful input to analysts’ earnings forecasts and stock recommendations than their own primary research, recent earnings performance, and recent 10-K and 10-Q reports. Another notable finding is that issuing earnings forecasts and stock recommendations that are well below the consensus often leads to an increase in analysts’ credibility with their investing clients. We conduct cross-sectional analyses that highlight the impact of analyst and brokerage characteristics on analysts’ inputs and incentives. Our findings are relevant to investors, managers, analysts, and academic researchers.

Keywords

Knowledge Use and Leverage; Investment; Analysis; Forecasting and Prediction; Stocks; Financial Services Industry

Citation

Brown, Lawrence D., Andrew C. Call, Michael B. Clement, and Nathan Y. Sharp. "Inside the “Black Box” of Sell-Side Financial Analysts." Journal of Accounting Research 53, no. 1 (March 2015): 1–47.
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More from the Authors

    • October–November 2019
    • Journal of Business Finance & Accounting

    A New Perspective on Post-Earnings-Announcement-Drift: Using a Relative Drift Measure

    By: Michael Clement, Joonho Lee and Kevin Ow Yong
    • Journal of Accounting & Economics

    Managing the Narrative: Investor Relations Officers and Their Interactions with Sell-Side Analysts and Institutional Investors

    By: Lawrence D. Brown, Andrew C. Call, Michael B. Clement and Nathan Y. Sharp
    • August 2016
    • Journal of Accounting & Economics

    The Activities of Buy-Side Analysts and the Determinants of Their Stock Recommendations

    By: Lawrence D. Brown, Andrew C. Call, Michael B. Clement and Nathan Y. Sharp
More from the Authors
  • A New Perspective on Post-Earnings-Announcement-Drift: Using a Relative Drift Measure By: Michael Clement, Joonho Lee and Kevin Ow Yong
  • Managing the Narrative: Investor Relations Officers and Their Interactions with Sell-Side Analysts and Institutional Investors By: Lawrence D. Brown, Andrew C. Call, Michael B. Clement and Nathan Y. Sharp
  • The Activities of Buy-Side Analysts and the Determinants of Their Stock Recommendations By: Lawrence D. Brown, Andrew C. Call, Michael B. Clement and Nathan Y. Sharp
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