A TWO-YEAR study by U.S. academics has found that companies are bestowing favors on analysts like helping them get country club memberships — and those favors appear to influence analysts’ stock recommendations.
The Economist reports that James Westphal of the University of Michigan and Michael Clement of the University of Texas, Austin surveyed several thousand analysts and executives over two years for their upcoming paper, Sociopolitical Dynamics in Relations Between Top Managers and Security Analysts.
“The research lulled its subjects into revealing more than they should by burying the nosiest questions in a much bigger, largely feel-good survey,” the magazine reports. “As a result, almost two-thirds of the analysts admitted to receiving favors from the firms they cover. And those favors appeared to sway their recommendations to their clients.”
So how much influence does a favor for an analyst get you? Quite a lot, according to the research:
“If a company suffers subpar profits, doing a good turn for an analyst cuts the likelihood of a downgrade by half. In the wake of a big acquisition, which analysts tend to frown on, the likelihood falls by 65%,” reports the Economist.
Damning stuff, for sure, and something the National Investor Relations Institute in the US would do well to address with its members instead of wasting energy reiterating outdated policies against blogs and online discussion forums.