Sell-side equity analysts and equity sales: A study of interaction

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Abstract

The extensive literature on sell-side analysts makes little reference to equity sales as a significant economic actor in the field. Drawing on a recent field study, our empirical evidence identified equity sales teams within brokers, who promote research to external clients, as a powerful agent cluster in close time-space proximity to analysts. This paper sheds light on analyst-sales interactions, which we contend represent an important field condition. The study employs concepts from strong structuration theory, in particular position-practice relations, to develop a narrative about sell-side analysts’ and sales team positional obligations, privileges, power relations and matters of trust. Our study makes three contributions. Firstly, we identify the symbiosis embedded in the relationship between sales and research - analysts need equity sales to market their product, to positively influence client perceptions of analysts and to provide access to prized fund managers. In turn, sales need analysts to provide content for them to market. Secondly, integral to sales-analyst interactions is the provision of feedback, which causes difficulties in the relationship, leaving analysts vulnerable to sales influence. Thirdly, regulatory tension has changed sales-analyst interactions, and this can enrich our understanding of why analysts continue to publish commoditised research into highly competitive markets.

Introduction

Because they (analysts) can become too cerebral in their thinking; that they’re the brains, and forget that brains are useless without distribution.’ (Sales 4).

Despite not being directly involved in investing or trading, sell-side analysts occupy the ‘centre court’ in the field of investment advice to institutional investors (Abhayawansa et al., 2018, p. 951). Given this prominent position, understanding analysts’ practices provides insights into how equity capital markets function (Chen, Danbolt and Holland, 2018). Predicated on the assertion that exploring the economic activities of analysts requires a thorough appreciation of social networks and relationships, there is an increasing body of sell-side analyst literature that engages with social theory to investigate analysts’ social context (for example, Abhayawansa, Aleksanyan, Imam, Millo and Spence, 2019a; Chen et al., 2018; Imam and Spence, 2016; Tan, 2014; Fogarty and Roberts, 2005). Despite the strong contribution from this body of work, prior studies have not undertaken detailed research on equity sales1 and their interactions with analysts. We argue that this is a significant omission which we address in our study.

The paucity of coverage of equity sales in sell-side research is particularly surprising given that most analysts work in the ‘sales, trading and research’ divisions of investment banks. Whereas we might argue that traders have a distinct market-facing function in buying and selling shares, the sales role entails ‘developing investment ideas from research’ (Stowell, 2018, p. 122) and so is directly proximate to the work of analysts. The apparent prominence of equity sales, coupled with the relative neglect of their role in the literature, suggests a clear and significant gap in our understanding of the analyst field and is central to the motivation for this investigation.

Additionally, this study responds directly to the call from Abhayawansa et al. (2019a, p. 25) for research studies that yield new insights into the networks of social relations in the sell-side field, ‘looking notably at the ways in which these actors interact with company management, brokers, and sales teams in investment banks.’ Consequently, our study sheds light on the equity sales role, how salespeople interact with analysts and, ultimately, the way in which such interactions shape the practices of the sell-side as reflected in our research question:

How do analyst interactions with equity sales teams influence their information gathering, processing and client servicing activities?

Section snippets

Overview

Sell-side analysts represent a cluster of economic actors typically employed in investment banks and brokerage houses (Cascino et al., 2014), covering companies in a specific industry (Boni and Womack, 2006). The literature supports the view that analysts hold influential positions, providing investment research services to a diverse range of market participants (Bradley, Gokkaya and Liu, 2017; Brown, Call and Clement, 2015). Such services encompass, amongst other things, information filtering,

Literature

The analyst literature, introduced in section 2 above, affirms the importance of the sell-side. However, there is also substantial evidence that raises doubts regarding the quality of analyst work. Scholars have found analyst outputs are overly optimistic and that asset managers routinely ignore their advice, driven in part by the multitude of conflicts of interest they face (for example, Chen et al., 2018; Green, Markov and Subasi, 2014; Cliff 2007). Such is the level of concern about the

Theoretical framework

In this section, we elaborate on the nature of the work of analysts, drawing upon the ideas of Stones (see 2015, 2005) on strong structuration theory. We view the work of analysts as being shaped within a web of position-practices relations (Stones, 2005, p. 81). Embedded inside a social web, analysts gain an understanding of their role in relation to others and the impact of context on their work. At the same time, they influence others as they are actively mapping out and navigating through

Research methods

The research methodology was constructed to give voice to the analysts and other actors in the field. The research is interpretive with a hermeneutic interest in understanding the lived experiences of the participants included in the study. Such a research philosophy led to the choice of an interview-based field study. In addition to the interviews, the research also included reviewing a variety of documents such as relevant press articles, media and consultant reports, research reports, job

Findings and discussion

The findings are structured as follows: 1) Position mapping of analysts and key agents in context; 2) Position-practices of analysts and equity sales; 3) Power relations and 4) Issues of trust between analysts and sales.

Conclusions

Our contention, supported by the evidence gathered for this research, is that the interactions between equity sales and analysts represents an underexplored and important field condition which influences, constrains and enables analyst work. We extend the knowledge of analyst context in the literature, explored by, for example, Imam and Spence (2016), Abhayawansa et al. (2019a) and Aleksanyan et al. (2018) by introducing original, detailed empirics about equity sales and how they play a

Funding

This research did not receive any specific grant from funding agencies in the public, commercial, or not for profit sectors.

Declaration of competing interest

None.

Acknowledgements

The authors are grateful to participants at the 2018 strong structuration theory workshop in Dublin. We are also indebted to participants at the 2018 British Accounting and Finance Association annual conference in London and the 2018 Management Accounting Research Group (MARG) conference at Aston University for their comments and suggestions. Finally, we thank two anonymous reviewers for their thoughtful feedback on earlier versions of the paper.

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