FAJ- Volume 64- Number 4- Page 37 Conclusion: “We examined analyst earnings forecast optimism and accuracy for buy-side analysts at a large, reputable money management firm relative to the optimism and accuracy of sell-side analysts in the 1997-2004 period. Our findings indicate that analysts at the buy-side firm made more optimistic and less accurate forecasts than their counterparts on the sell-side. As a percentage of actual earnings, the mean (median) buy-side forecasts are 8-16% (3-12%) higher than those on the sell-side, and the buy-side mean (median) absolute forecast errors are 11-15% (4-11%) higher than those of their sell-side peers. We conclude that roughly 1/3rd of the buy-side analysts’ forecast optimisim and 1/5th of their absolute forecast error is attributable to the buy-side firms higher retention rate for low-quality analysts” OUCH to buy side analysts. I dont agree with the low-quality analysts, but I do agree that sell-siders have access to way more information that they can use in their reccomendations which the buy-side does not (interaction with sales reps, traders and clients which provides valuable insight to the sell-sider)
this was a good article
IH8FSA Wrote: ------------------------------------------------------- > OUCH to buy side analysts. I dont agree with the > low-quality analysts, but I do agree that > sell-siders have access to way more information > that they can use in their reccomendations which > the buy-side does not (interaction with sales > reps, traders and clients which provides valuable > insight to the sell-sider) I don’t think I agree with this. The sell-side does have more info., including greater access to management, but most of the info. is not really that useful. Who cares what sales people think? Most of the sales people I work with don’t know anything. Traders don’t really know anything, either (I’m excluding prop traders here, who are mostly quant types anyway). We’re talking about earnings forecast accuracy here, not any other tangential info. that may be relevant to what direction the stock is expected to go. I think part of the issue may be the way in which the study defines buyside. The buyside is a pretty big place, and not everyone is focusing on trying to make the most accurate earnings predictions possible, as is basically the case on the sell side (there are at least two sell side products – institutionally oriented research and private client research, the former of which is based on information flow and strives to create the most accurate EPS estimates possible). Most shops are entirely focused on their institutional product, which means having the most detailed and accurate EPS models possible – in fact, at a lot of shops, the analyst strives to max. his Morning Star rating, which has a lot to do with EPS accuracy. If all you did was spend your time honing your EPS estimate, versus someone who spends some time on that and some time on other things, who do you think would be more accurate? This is one of the five or six ways the sell side gets paid, after all – for access to these (hopefully) highly accurate models. Anyway, I am not sure what this really proves. Most of the sell side analysts I know are great at modeling but terrible at picking stocks. I haven’t worked on the buyside yet, but I would guess it’s hard to stick around for a long time as a terrible stock picking buyside analyst. Of course EPS forecast accuracy and stock picking go hand in hand to a certain extent, but there’s more to picking stocks that earnings… a lot more, and this may be reflected in the analyst’s estimates. Just a thought.
“The sell-side does have more info., including greater access to management, but most of the info. is not really that useful. Who cares what sales people think? Most of the sales people I work with don’t know anything. Traders don’t really know anything, either (I’m excluding prop traders here, who are mostly quant types anyway). We’re talking about earnings forecast accuracy here, not any other tangential info. that may be relevant to what direction the stock is expected to go” But if your not a contrarian, and you expect a strong quarter, but a ton of people are bashing the stock, you are more inclined to have a downward bias and not be so optimistic, and I think that is what the study is trying to prove. ??
IH8FSA Wrote: ------------------------------------------------------- > But if your not a contrarian, and you expect a > strong quarter, but a ton of people are bashing > the stock, you are more inclined to have a > downward bias and not be so optimistic, and I > think that is what the study is trying to prove. > ?? I don’t understand what you wrote. Do you mean that you are optimistic but the Street is pessimistic so you lower your guidance to be more in line with consensus (i.e., you are not a contrarian)? I didn’t read the study – I was just responding to your comments. If the study is concluding that people tend to cling to consensus, I would agree with that. It’s kind of ironic though since if everyone is managing to consensus, it becomes sort of a self-fulfilling prophecy. There’s probably some sort of behavioral arb opportunity there…
I think Figure 4 (and the associated verbiage). Looks like optimism increases for analysts who move from sell-side to buy-side. This seems to indicate that there’s something in the incentive srructure or environment of buy-side that drives the differences in optimism, rather than just some kind of a sample-selection effect.