Question

The existing literature on sell-side analysts demonstrates that not only analysts err in their forecasts, valuations and investment recommendations, but that they are also biased. Critically discuss the potential causes of errors and biases of sell-side analysts working at: (a) brokerage houses that do not offer any investment banking services to the companies covered by their analysts; (b) large investment banks that offer an entire spectrum of other services to the companies covered by their analysts; and (c) pure research firms that only offer analyst research services.

Answer 1

(a) The potential cause for biasness of sell side analysts working at brokerage houses is that they will try to give more reports that will lead to the brokerage house to earn more. The brokerage house will earn more when the clients will sell the stocks that they have. Hence, there is biasness in the sell side analyst report.

(b) large investment banks provide wide spectrum of services to their customers. The sell side analysts provide information regarding the investment opportunities that are available and profitable for the investors. The bias is for providing the details such that the investors invest more money.

(C) The bias in giving the reports to pure research firms is that the sell side analyst will give a preferable report for the companies that they like and unpreferable report for companies that they do not like. The reports will be according to the likes of the analyst.