The value of stock-analysts has often been questioned (not much by themselves of course!).
Some work has found they have a beneficial effect as guardians of corporate governance, but other literature notes they can collude with companies and increase market risk by trend following and over-hyping fundamentally shabby propositions.
Recognizing the absence of value in contradictory work Yifan Meng (et al.) of the Southwest Jiaotong University decided to narrow analysis to a simple question ‘Can ‘good’ analysts help prevent stock price crashes’?
I.e. can the work of skilled analysts flag problems before they build up behind a wall of secrecy causing stock price collapse when the dam of obfuscation finally breaks?
The researchers found as follows:
- “..skilled analysts suppress stock price crash risk by reducing both internal and external information asymmetry and mitigating agency problems.” [Their definition of ‘skilled’ is based on a detailed analysis of past performance, the full details are in the note]
- This effect though is weaker for older companies and companies with a high percentage of shares in a few large institutional hands. The reason seems to be big-stake shareholders keep these sorts of company on the straight and narrow in the first place.
- The effect of total-analyst coverage is the complete opposite of where skilled players are dominant. It seems the more analysts covering a company the more likely it is to suffer a crash. This may be because ‘good’ analyst effect is drowned out by ‘bad’ analyst’s noise.
For investors the conclusion is clear. Young companies, if covered by established and competent analysts, are at less risk to stock price crashes than the same when covered by a thundering herd.
This is not the same as saying these are companies in which you won’t lose money. If you do though it’ll be in an orderly fashion in response to timely-flagged bad news. Investing is hard!
You can access the paper in full via the following link [Can] Skilled Analysts Decrease the Stock Price Crash Risk?
Happy Sunday.