Essays on characteristics of sell-side financial analysts and information environment of financial markets

Abstract

Sell-side analysts play important roles in modern financial markets, especially during the process of information production and incorporation. Therefore, characteristics of sell-side analysts and how they change the information environment of financial markets have been interesting topics to explore. In this thesis, I conduct several research to explore the roles that sell-side analysts play in the stock markets, especially during the information production and transmission process.

First, I study how MiFID II changes the overall price informativeness and information environment of European stock markets through changing the incentives of sell-side analysts. MiFID II affects sell side analyst incentives in Europe, forcing analysts to justify the value they add. While the number of analysts decreases, the average stock return synchronicity with the market also decreases, implying an improvement in aggregate price informativeness. The decrease in synchronicity is larger for firms that are more important for the analysts and brokers covering them. It is also asymmetric and substantially larger for negative market movements. Our results suggest that, by changing incentives, MiFID II not only improves the quality of individual analyst work, but also achieves an improvement in the aggregate stock price informativeness.

Next, I further explore how seniority of analyst teams changes the performance of sell-side analysts and analyst teams differently. I find evidence to show that analysts perform better when working in teams by using Chinese stock market data and sell-side reports from 2000 to 2021. I study the role that seniority plays in determining the performance and market impact of analyst teams and individual analysts. By double sorting on recommendation revisions direction and seniority ranking, I show that analyst teams with higher mean seniority significantly out-perform their counter parts by higher market impact and lower forecast error. But I don’t observe similar phenomenon for individual analysts that work by themselves. I further enhance these results by using team-change as a direct opportunity to study the role of senior analysts within an existing analyst team and find evidence to show that senior analysts could significantly improve the relative forecast accuracy. These results indicate that seniority plays important roles in determining the overall performance of analyst teams. It seems seniority of analysts is an important and valuable attribute in determining performance, but only kicks in when analysts work together.

Finally, I study the relationship between price informativeness and synchronicity of stock returns. The relationship between synchronicity and the level of firm-specific information incorporated into stock prices has long been under debate. In this research, I find evidence to show that lower synchronicity indicates higher amount of firm-specific information incorporated into stock prices, and therefore better stock price informativeness, by using recommendation revisions issued by sell-side analysts. I further find that synchronicity starts to decrease as early as 15 trading days before actual announcements of recommendation revisions, suggesting possible leak of valuable firm-specific information from sell-side analysts way ahead of time.

Date of Award	24 May 2023
Original language	English
Awarding Institution	University of Bath
Supervisor	Ru Xie (Supervisor) & Hanwen Sun (Supervisor)