Here’s something a bit counter-intuitive: sell-side analysts tend to more accurate and less optimistic than their counterparts on the buy sell side according to a trio of Harvard Business School academics published in the July/August edition of the CFA Institute Financial Analysts Journal.
While Boris Groysberg, Paul Healy, and Craig Chapman examined data from the buy-side at just one US investment firm – comparing this with publicly available data on US sell-side analysts – the gap was clear.
As a percentage of actual earnings, the mean (median) buy-side forecasts are 8-16 percent (3-12 percent) higher than those on the sell side, and the buy-side mean (median) absolute forecast errors are 11-15 percent (4-11 percent) higher than those of their sell-side peers.
The authors reckon there is a simple explanation – the investment firm didn’t sack enough under performing analysts and didn’t rigorously benchmark their performance.
We conclude that roughly one-third of the buy-side analysts’ forecast optimism and one-fifth of their absolute forecast error is attributable to the buy-side firm’s higher retention rate for low-quality analysts…The performance differences also appear to have arisen because the buy-side firm did not measure its own analysts against the sell side, whereas sell-side analysts are regularly measured against each other.
Related links:
Financial Analysts Journal – CFA Institute