Some Analysts Use Stock Ratings to Get New Jobs

Analysts who are looking to get a job working for a company they cover take a more optimistic stance and issue more reports on the companies they wish to work for, according to a recent study.

Analysts who are looking to get a job working for a company they cover take a more optimistic stance and issue more reports on the companies they wish to work for. Ben Lourie, a Ph.D. student at UCLA, identified this pattern after looking at 299 sell-side analysts who changed employment from a brokerage firm to a company they covered while working at the brokerage firm.

During the last year of employment with a brokerage firm, “revolving-door analysts” issue more favorable ratings and higher target prices than other analysts covering the same companies do. The optimism among revolving door analysts increases during their final year of employment as sell-side analysts relative to earlier in their careers. Notably, the optimism does not carry over to earnings forecasts. Lourie thinks this may be because the analysts do not want to make it harder for the company to meet or beat profit projections.

Revolving-door analysts also issue more reports about their would-be employers then other analysts do. The increased attention occurs in the final year for the target company. There is no notable increase in the number of reports issued on other companies by revolving-door analysts over the same time period.

Notably, the increased attention does not lead to better accuracy. Rather, the revolving-door analysts tended to make less accurate forecasts throughout their careers.

The results of Lourie’s findings show the importance of not relying on the comments or recommendations of a single analyst. Rather, look at a variety of factors before forming an opinion.

There is one benefit to this behavior, however. Companies who hire revolving-door analysts to work as investor relations officers have 31.9% higher probability of meeting or beating earnings expectations than firms that hire someone else for the same position. These companies also tend to experience a bigger increase in the number of analysts covering them.

Source: “The Revolving-Door of Sell-Side Analysts: A Threat to Analysts’ Independence?” Ben Lourie, SSRN, November 13, 2014.