A comparison of buy‐side and sell‐side analysts

Abstract

There is very little research on the topic of buy‐side analyst performance, and that which does exist yields mixed results. We use a large sample from both the buy‐side and the sell‐side and report several new results. First, while the contemporaneous returns to portfolios based on sell‐side recommendations are positive, the returns for buy‐side analysts, proxied by changes in institutional holdings, are negative. Second, the buy‐side analysts’ underperformance is accentuated when they trade against sell‐side analysts’ recommendations. Third, abnormal returns positively relate to both the portfolio size and the portfolio turnover of buy‐side analysts’ institutions, suggesting that large institutions employ superior analysts and that superior analysts frequently change their recommendations. Abnormal returns are also positively related to buy‐side portfolios with stocks that have higher analyst coverage, greater institutional holding, and lower earnings forecast dispersion. Fourth, there is substantial persistence in buy‐side performance, but even the top decile performs poorly. These findings suggest that sell‐side analysts still outperform buy‐side analysts despite the severe conflicts of interest documented in the literature.