Buy-side analysts tend to recommend stocks that are less volatile and more liquid than those recommended by sell-side analysts, according to a new working paper from Harvard Business School.
While considerable research during the last twenty years has focused on the performance of sell-side analysts (that is, analysts who work for brokerage firms, investment banks, and independent research firms), much less is known about buy-side analysts (analysts for institutional investors such as mutual funds, pension funds, and hedge funds).
The study finds that buy-side firm analysts recommended stocks with stock return volatility roughly half that of the average sell-side analyst, and market capitalizations almost seven times larger. These findings indicate that portfolio managers (buy-side analysts’ clients) prefer that buy-side analysts cover less volatile and more liquid stocks.
The study also finds that the buy-side firm analysts’ stock recommendations are less optimistic than their sell-side counterparts, consistent with buy-side analysts facing fewer conflicts of interest.
For stocks covered by both buy- and sell-side analysts, there were no differences in the buy recommendations’ performance.
The failure to find that buy-side research out-performs that of sell-side analysts raises questions about whether investment firms should continue to rely on their own research rather than using research from sell-side analysts.
Resolving whether buy-side research creates value is highly relevant to managers at buy-side firms who are faced with the challenge of allocating limited research resources.
For details see THE STOCK SELECTION AND PERFORMANCE OF BUY-SIDE ANALYSTS
The Asia-Pacific banking industry faces a turning point in 2012 following three years of stable performance, according to Standard & Poor’s.
We believe that the high loan growth and moderate credit costs the sector has enjoyed could become a thing of the past. Instead, Europe’s debt crisis, lower regional economic growth, and contraction in some property markets could impair loan quality and push credit costs higher.
“In our view, slower economic growth is likely to impede credit growth and fee-based activities for banks, and this, in turn, could weaken profitability,” said Standard & Poor’s credit analyst Naoko Nemoto. “Instability in the global financial markets could also hurt Asia-Pacific banks that rely on wholesale funding, and higher funding costs would squeeze
net interest margins.”
Yet despite these potential hurdles, we expect adequate capitalization, strong systemwide liquidity, and low levels of nonperforming loans (NPLs) to help Asia-Pacific banks navigate a difficult 2012. Currently, a majority of our bank ratings fall into the single ‘A’ category or higher, and 80% of our outlooks on Asia-Pacific bank group ratings are stable, which reflects our view that most rated banks will be able to withstand the pressure.
Under our base-case scenario, we assume that the global economy will slow but
avoid a severe recession. If the Asia-Pacific economy faces a sharp and prolonged downturn due to a global recession, causing a surge in credit costs and capital deterioration, we could consider negative rating actions. A hard landing in China, with weaker economic growth than our base-case scenario of 7.7%-8.0% GDP growth, would have significant knock-on effects on growth in the Asia-Pacific region. However, this downside scenario is unlikely in our current view.
For details, see: Asia-Pacific Banking Outlook: Higher Credit Costs And Lower Earnings Will Test Banks In 2012
Standard&Poor’s also has published industry reports on the banking sectors of 14 countriesin the Asia-Pacific region. They can be found at the Alacra Store by selecting Standard&Poor’s from the Publisher tab and entering “banking outlook” in the search box.
Successful completion of the distressed bond exchange provides significant debt relief and allows Greece to avoid an immediate hard default on a bond maturing later this month, says Moody’s. However, the risk of a later default remains high.
From Moody’s Weekly Credit Review.
The exchange is a significant milestone in the evolution of Greece’s sovereign crisis and removes one important source of uncertainty plaguing European sovereign and bank debt markets. Yet even with the debt exchange reducing Greece’s debt burden by more than €100 billion and the Troika programme providing lower financing costs, the risk of Greece defaulting after the debt exchange has been completed remains high.
Even under optimistic assumptions, we do not expect Greece’s debt burden to return to 120% of GDP until 2020 at the earliest.
The magnitude of the debt haircut and the country’s actions in coercing the participation of holdouts increases the likelihood Greece will not have access to the private market once the second assistance package expires.
Meanwhile, Greece faces significant challenges implementing its planned fiscal and economic reforms and satisfying the conditions for ongoing financial support from the Troika. Given that most of Greece’s remaining debt will be owed to its euro area partners, the European Financial Stability Facility, or the IMF, any future debt restructuring will involve not only losses for private-sector investors, but also likely include official sector involvement, with an accompanying escalation in political risks.
Firms with lower disclosure on their anticorruption efforts may make more sales in corrupt countries than their high-disclosure peers, but they are likely to make less money from them, according to a new working paper from Harvard Business School.
The study examines 480 of the world’s largest companies, using ratings by Transparency International of firms’ public disclosures of strategy, policies, and management systems for combatting corruption. Professors Paul Healy and George Serafeim find that firm disclosures are related to enforcement and monitoring costs, such as home country enforcement, US listing, big four auditors, and prior enforcement actions. Disclosures also reflect industry and country corruption risks. Meanwhile the financial implications of fighting disclosure are more nuanced. Key concepts include:
- While firm-level research on corruption is still at the formative stage, findings suggest that disclosure is more than cheap talk.
- Firms with high disclosure on their anticorruption efforts are committed to fighting corruption. The policies and enforcement actions reflected in their disclosures help to protect their public reputation and profitability, but at the cost of slower sales growth in high corruption risk markets.
- Firms with abnormally low disclosure have roughly 15 percent higher sales growth in corrupt country markets than their high disclosure peers. But this higher growth is accompanied by lower profit margins and return on equity.
- Firms with abnormally high anticorruption ratings have a lower frequency of subsequent allegations of corruption in the media, suggesting that disclosures reflect their commitment to fighting corruption.
- Future research could examine (among other issues) what factors, other than monitoring/enforcement costs and risk exposures, explain the differences in firms’ level of disclosure and commitment to fight corruption.
Fore details, see Causes and Consequences of Firm Disclosures of Anticorruption Efforts
Companies that manage for the short term present their investors with more risk, according to a new working paper from Harvard Business School.
Short-Termism, Investor Clientele, and Firm Risk, by Francois Brochet, Maria Loumioti, and George Serafeim finds that for one thing, short-term firms have share prices that are more volatile than companies managing to a longer time horizon.
Firms focused on near-term results are characterized by “high absolute discretionary accruals, high likelihood of just beating analyst forecasts, reporting very small positive earnings, and just avoiding violating loan covenants.
“From Using conference call transcripts, we measure the time horizon that senior executives emphasize when they communicate with investors. We show that firms focusing more on the short-term have a more short-term oriented investor base. Moreover, we find that short-term oriented firms have higher stock price volatility, and that this effect is mitigated for firms with more long-term investors. We also find that short-term oriented firms have higher equity betas and as a result higher cost of capital. However, this result is not mitigated by the presence of long-term investors, consistent with these investors requiring a risk premium for holding the stock of short-term oriented firms. Overall, our evidence suggests that corporate short-termism is associated with greater risk and thus affects resource allocation.”