Buy Side Analysts And Earnings Conference Calls
Michael J. Jung
New York University – Leonard N. Stern School of Business
M.H. Franco Wong
University of Toronto – Rotman School of Management
Frank Zhang
Yale School of Management
February 22, 2016
Abstract:
Companies’ earnings conference calls are perceived to be venues for sell-side equity analysts to ask management questions. In this study, we examine another important conference call participant — the buy side analyst — that has been underexplored in the literature due to data limitations. Using a large sample of transcripts, we identify 3,869 buy side analysts from 708 institutional investment firms that participated (i.e., asked a question) on 13,411 conference calls to examine the determinants and implications of their participation. Buy-side analysts are more likely to participate when sell-side analyst coverage is low and dispersion in sell-side earnings forecasts is high, consistent with buy-side analysts directly acquiring information when a company’s information environment is poor. Institutional investors trade more of a company’s stock in the quarters in which their buy-side analysts participate on the call. Finally, we find evidence that buy side analyst participation is associated with company-level changes in trading volume, institutional ownership, and short interest.
Buy Side Analysts And Earnings Conference Calls – Introduction
The role of sell-side equity analysts in the capital markets has been researched extensively by academics over the past several decades (Bradshaw [2011]). In contrast, due to data limitations, there has been very little research on buy-side analysts. Buy-side analysts work for institutional investment firms and have different incentives and responsibilities compared to their sell-side counterparts working at brokerage firms (Groysberg, Healy, and Chapman [2008]), which makes buy-side analysts not only worthy of study in their own right, but also makes it unclear as to whether the inferences and conclusions from the sell-side analyst literature are generalizable to buy-side analysts. While it is widely assumed that buy-side analysts conduct fundamental research and make stock recommendations to their firms’ portfolio managers, little is known about how they gather information because their research activities are not generally observable. In this paper, we contribute to the literature on buy-side analysts by 1) using earnings conference call transcripts to identify a large sample of buy-side analysts from institutional investment firms that participated (i.e., asked a question) in the calls, 2) examining the economic determinants of their participation, 3) investigating the role of their participation in their investment firms’ trading of the companies’ stock, and 4) exploring the implications for future stock returns, trading volume, total institutional ownership, and short interest of the company hosting the conference call.
The few published papers on buy side analysts have focused on the outputs of their research: earnings forecasts and stock recommendations (Groysberg, Healy, and Chapman [2008], Groysberg, Healy, Serafeim, and Shanthikumar [2013], Cheng, Liu, and Qian [2006], Rebello and Wei [2014], Frey and Herbst [2014]). Typically using proprietary data from a single institutional investment firm, these papers conclude that research generated by buy-side analysts has value and is associated with positive abnormal returns for the funds that use it. In contrast to studies that focus on the outputs of buy-side research, Brown, Call, Clement and Sharp [2015] survey 344 buy-side analysts from 181 investment firms and conduct follow-up interviews with 16 analysts to gain insights about the inputs and incentives that shape buy-side research. Their survey evidence suggests that recent 10-K/Qs are more useful than earnings conference calls, management guidance, and recent earnings performance in determining buy-side analysts’ stock recommendations.
hroughout this paper, we refer to “participation” as asking at least one question during a company’s conference call because we cannot observe analysts (buy-side or sell-side) who merely listen during the call or who wanted to ask a question but were not selected by management (Mayew [2008]). We examine buy-side participation to shed light on its importance as one of the research activities performed by buy side analysts and to answer several unexplored research questions. In particular, we are interested in understanding the prevalence of buy-side analysts in companies’ earnings conference calls and the reasons they participate in the calls. We also test predictions about whether buy-side analyst participation is related to a company’s information environment, trading in the company’s stock by the employing institution, and company-level price discovery.
Using a sample of 57,784 conference call transcripts from the second quarter of 2002 through the first quarter of 2009, we identify 3,869 buy-side analysts from 708 institutional investment firms who asked at least one question on 13,411 earnings conference calls. Our sample includes some of the largest investment firms in the U.S. (e.g., Blackrock, Fidelity, Wellington, and T. Rowe Price) and several of the buy side analysts named in Institutional Investor magazine’s annual “Best of the Buy-Side” rankings, as voted by hundreds of sell-side analysts each year.2 The participation by these highly-respected buy-side analysts suggests that asking questions on a conference call is an important aspect of their research and due diligence. Buy-side analysts ask questions in 23% of all earnings conference calls, over 3,000 conference calls have two or more buy-side analysts asking questions, 77% of the companies in our sample have had at least one conference call with buy-side participation, and buy side analysts represent 5% of all questioners. Thus, while the vast majority of conference call participants are sell-side equity analysts, participation by buy-side analysts in earnings conference calls is not uncommon.
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