Inside the "Black Box" of sell-side financial analysts

Lawrence D. Brown, Andrew Call, Michael B. Clement, Nathan Y. Sharp

Research output: Contribution to journalArticle

141 Citations (Scopus)

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.

Original languageEnglish (US)
Pages (from-to)1-47
Number of pages47
JournalJournal of Accounting Research
Volume53
Issue number1
DOIs
StatePublished - Mar 1 2015

Fingerprint

Analysts
Black box
Financial analysts
Stock recommendations
Incentives
Analysts' earnings forecasts
Factors
Investors
Communication
Managers
Institutional investors
Investing
Earnings quality
Industry
Earnings forecasts
Brokerage
Credibility

Keywords

  • Analyst compensation
  • Analyst incentives
  • Analyst inputs
  • Industry knowledge
  • Private communication
  • Sell-side analysts

ASJC Scopus subject areas

  • Finance
  • Accounting
  • Economics and Econometrics

Cite this

Inside the "Black Box" of sell-side financial analysts. / Brown, Lawrence D.; Call, Andrew; Clement, Michael B.; Sharp, Nathan Y.

In: Journal of Accounting Research, Vol. 53, No. 1, 01.03.2015, p. 1-47.

Research output: Contribution to journalArticle

Brown, Lawrence D. ; Call, Andrew ; Clement, Michael B. ; Sharp, Nathan Y. / Inside the "Black Box" of sell-side financial analysts. In: Journal of Accounting Research. 2015 ; Vol. 53, No. 1. pp. 1-47.
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