Innumerable daily news reports plus a large body of scholarship affirm stock analysts’ price-moving influence to be considerable, a presumption with profound effects on matters ranging from regulatory statutes to theories of market efficiency to the ample pay of analysts themselves.
But now new research by two Freeman School finance professors raises fundamental doubts about this reputed power.
A working paper by Robert S. Hansen and Vadim S. Balashov of the Freeman School and Oya Altinkilic of the University of Pittsburgh finds analysts’ earnings forecasts to be “information free.”
“Analyst forecasts generally reiterate public information that is already accounted for in stock prices,” conclude the authors. And this “suggest[s] that markets are informationally too efficient for brokerages to support significant information intermediaries.”
Further, the study’s findings apply not just to analysts on average, but to “superior forecasters who in the past have been reported to significantly reduce market inefficiency.”
“We looked at the top 20 percent of various groups that might be the most likely to move the market—analysts whose forecasts are the most accurate or the boldest or the fastest or those who are affiliated with the leading brokerages,” says Hansen, Francis Martin Chair in Business at the Freeman School. “For no group was there any evidence of economically significant influence on the market. If some elite group had this effect, it should have shown up in our numbers.
“Analysts may be a very smart people,” he adds, “but as a matter of stubborn fact, the market pays them little heed and they are unlikely guides to beating the market. Maybe this study will inspire a little humility, and, given recent history, that may not be so bad.”
What accounts for conclusions so at variance with a large body of scholarly research, not to mention an even larger amount of financial journalism? The answer lies with the study’s methodology. In contrast to other studies that typically measure share-price movements on the day of analyst forecasts or the days surrounding it, the new study zeroes in on the 40 minutes surrounding the time in which forecasts are made in order to isolate the impact of the revisions from other news, such as announcements or forecasts by the companies themselves.
And how much do stocks move in the 40 minutes surrounding analysts’ daytime earnings-forecast revisions? A mere plus or minus four basis points (0.04 percent), an economically piddling amount.
The paper reveals markets to be far more efficient than earlier findings would suggest. In the efficient-market view, which is most identified with Eugene Fama of the University of Chicago, stock prices reflect all public information, a notion that would be discredited by evidence that analysts can regularly unearth neglected public information and impound it into stock prices via their reports. The new findings, the authors believe, significantly broaden the empirical foundation for the efficient-market view.
Finally, the findings raise basic questions about the value of analysts themselves, an issue that prompts the authors to call “for research focusing on other roles that have been identified for analyst reports,” such as “the promotion of other brokerage business, enhancing both investment banking deal flow and brokerage trading.” In addition, “analyst research could also expand common information about followed firms, which could thus lower their cost of capital.”
“It’s not a question of doubting that analysts have value,” Hansen says. “It’s just that their value doesn’t include what they have gained the most celebrity for—namely, helping investors beat the market. That claim turns out to be a bridge too far.”
Analysts can add value in a variety of ways that enhance share value. Hansen says they enhance investor recognition and awareness of the stock, and this ultimately leads to a lower cost of capital and thus greater firm value.
“Clients often need a variety of information about followed firms and analysts provide that information,” he says. “I would say above all that investors place a premium on the accuracy of analyst reports, and thus it is the more accurate analysts who likely are the more influential over time.”
