Buy-side analysts, free of the potential conflicts of interest that dog their sell-side peers, must produce better research, right? Wrong. A Harvard Business School study released this summer comparing the two camps’ earnings projections found that buy-side analysts made more-optimistic — and less-accurate — forecasts than their sell-side counterparts.
Paul Healy, one of the study’s authors, says the metrics for benchmarking buy-side analysts are less transparent, making it harder for firms to measure their performance. As a result, buy-side analysts churning out inaccurate research are more likely to be retained than their sell-side peers, whose errors quickly become apparent. “Sell-side research is better than people think,” Healy says. “A lesson one can learn from the sell side is how the analysts are managed and the degree of competition among them.” The study, which ran research from both groups of analysts from 1997 to 2004 through mathematical models that measure optimism and accuracy of earnings forecasts, also found that analysts who move from sell-side to buy-side firms perform worse after the switch. “There is something more fundamental about the process of managing research at the buy-side firms,” says Heal.
