Everyone knows the game that sell side analysts play, it’s not a secret and never has been. In order to curry favor for their corporate access and investment banking businesses, sell side analysts sandbag their earnings estimates. After the tech bubble crash, the government made a half-hearted effort (at best) to limit the bias. Not only did the government fail (see: “Did Analyst Forecast Accuracy and Dispersion Improve after 2002 Following the Increase in Regulation?”, CFA Institute), it sat and watched as another round of analysts at the ratings agencies enabled the credit crisis to take place. Over and over, around and around we go, the same game, the same problem.
Today I can say with undeniable evidence, the game is over as a result of our work at Estimize. In their paper, “Does Crowdsourced Research Discipline Sell Side Analysts” Russell Jame from the University of Kentucky along with his colleagues find a 63% drop in forecast pessimism over a three year period as the result of shaming by the more accurate and representative crowdsourced Estimize data set. They state, “competition can impact analysts’ reputational concerns by increasing the likelihood that their bias will be exposed to the market. For example, a forecast from an analyst who has stronger incentives to be unbiased can help discipline other analysts by serving as a benchmark and helping investors unravel incentive-driven biases.”
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When we launched the Estimize platform five years ago our goal was to build the most accurate and representative data set of forward looking expectations possible. We’ve often been asked if we’re trying to destroy sell side analysts, and the answer has always been “no”. Our aim is to remove the bad influences of the biased sell side forecasts on the market by providing a better and more accessible option to investors. We didn’t know if the sell side would change its behavior or not, but we’re glad to see it happen as their estimates, which also feed into our system, only help to make the total data set more robust.
I’m proud that we’ve been able to solve a problem that our government was unable or unwilling to solve on their own through serious regulation. According to Jame, “our results point to competition from new entrants (Estimize) as a force upending the investment research industry and disciplining the sell-side. The arrival of Estimize can be viewed as the culmination of a decades-long trend of technology empowering investors to bypass traditional sell-side research and decades-long investor criticism of conflicts of interest in the investment research industry. Our findings suggest that encouraging new forms of competition may be effective in both reducing investor reliance on the sell-side and in constraining sell-side bias, without the unintended adverse consequences of traditional regulatory approaches.”
If you are a quant investor interested in accessing our raw data or the Estimize Signal, please contact us here, email us at [email protected] or call us at 888-447-4189. We invite discretionary investors to take a look at our Estimize Earnings Edge platform to help with idea generation and risk management.
Estimize clients include some of the largest quant funds in the world, including WorldQuant and McKinley Capital Management, as well as large discretionary portfolio managers. This is just one of several academic studies that have reported on the superiority of Estimize data, including the Deutsche Bank paper below.
“We found multiple benefits to using the Estimize dataset; especially in the case of short term applications in which accuracy is essential.”
— Deutsche Bank Quant Research (full report here)
Leigh Drogen, Founder and CEO of Estimize