“[Equity] research in commotion: Is it getting harder for securities analysts to pay their way?”

The Economist would like you to think that the answer is still up in the air: while on the one hand, sell-side research budgets are shrinking –and in some cases disappearing altogether– on the other, a recent study* comparing the accuracy of a single buy-side firm’s recommendations to that of a sample of sell-side recommendations shows that the single buy-side firm is less accurate than the sample of sell-side firms.

The authors of the paper* attempt to establish the validity of their conclusion by comparing the stated performance of a sample of buy-side firms to that of sell-side ‘buy’ recommendations. The major flaw in this paper is not that the sample size consists of one, but that the authors characterize the buy-side as a consortium of long-only mutual funds, and altogether ignore Read the rest of this entry »