Wall St. firms have cut the number of securities analysts they employ since the scandal of 2000 when some professional stock pickers aligned themselves too closely with the M&A bankers who they worked with. Research was tainted by banking fee income. The period when a top analyst could make millions of dollars a year largely came to an end.
It turns out the investors may never have paid much attention to analyst opinions about stocks and the market.
The FT reports that “Analysts’ earnings forecasts have a negligible effect on a company’s share price, according to new research that will raise further doubts over stock-pickers’ ability to move markets.”
“The authors of the study – Robert Hansen and Vadim Balashov of Tulane University and Oya Altinkilic of the University of Pittsburgh – looked at 196,000 revisions of quarterly and longer-term earnings forecasts by analysts between 1997 and 2007.”
The news is another nail in the coffin of buy-side based analysis. Many individual investors use services like S&P, which are provided to them by their brokers, usually for free. Institutions like mutual funds that hold large equity positions use their own analysts.
The failure of the power of analysts to move stock prices is probably tied to the proliferation of information and its instant delivery over the internet. When there is too much data, many people ignore all of it. Those risking money in the market may believe it is just better to make up their own minds.
Douglas A. McIntyre
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