Abstract:

: Taking advantage of a recently established dataset that records financial analysts’ firm visits, this study examines the factors that determine the number of buy-side and sell-side analyst firm visits in a given year and how investors respond to these visits. Both buy-side and sell-side analysts seem motivated to visit firms when they are considering buying or recommending that investors buy shares rather than when they are considering selling or when they are recommending that investors sell shares. However, there are still significant differences in the firms that buy-side and sell-side analysts choose to visit. Using a binomial count model, this study shows that buy-side analyst firm visits are heavily focused on industry leaders—firms with a high share of the total revenue in their given industry—while sell-side analyst firm visits are not. By looking at the response of investors to buy-side or sell-side analyst firm visits, a regression analysis uncovers evidence that investors trust buy-side analysts, responding to firm visits by buy-side analysts by purchasing more shares in the firm. Investors do not have the same level of confidence in sell-side analysts. Investors respond to firm visits by sell-side analysts by selling more shares in the firm. This phenomenon is even more significant for firms that are outperforming the market. The results suggest that there is a significant cost to the conflict of interest inherent in sell-side analysts’ research. These costs increase when analysts recommend outperforming firms to the public.

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