This content is from: Corner Office

How Equity Analysts Filled the Covid-19 ‘Information Void’

Research shows that investors were more responsive to the deluge of sell-side research produced during the pandemic — even as forecast accuracy declined.

The research output of equity analysts went up dramatically during the Covid-19 pandemic — but the accuracy of their forecasts went down, according to a new study from the University of London’s Cass Business School. 

Compared to the pre-pandemic months, analyst forecasts for company earnings per share, or EPS, increased by 72 percent in March 2020, indicating that sell-side analysts’ “initial response to pandemic-induced market uncertainty is to increase their provision of information,” according to the study’s author Pawel Bilinski, director of the Centre for Financial Analysis and Reporting Research at Cass.

For other forecasts, such as revenue, cash flow, and dividend estimates, Bilinksi uncovered a similar pattern. The number of revenue forecasts increased by 80 percent in March, while cash flow forecasts jumped 59 percent and dividend estimates grew by 11 percent, according to the paper. The study was based on over 400,000 EPS forecasts and revenue, cash flow, and dividend estimates made by sell-side analysts from January 2018 to November 2020. 

The increase in research activity came as the Covid-19 pandemic sent a series of shock waves rippling through the global economy, creating an uncertain and volatile market environment. Bilinksi suggested that investors may have looked to analysts to fill the “information void” brought on by the pandemic, echoing anecdotal evidence from equity research departments. In interviews with Institutional Investor over the last year, sell-side research executives reported dramatic increases in readership of reports, attendance at virtual conferences and corporate access events, and interactions between analysts and clients. 

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All this uncertainty and volatility did not foster an optimal environment for precise forecasting, however. In fact, EPS forecast errors increased nearly 77 percent in the first quarter of 2020, according to the study. Revenue, cash flow, and dividend predictions were also less accurate. Bilinski noted that “lower accuracy does not necessarily reduce the supply nor informativeness of research,” adding that investors had stronger reactions to analyst revisions compared to the preceding years. This phenomenon was “magnified in periods of increased information demand” as captured by Google search data, he said.

“Despite lower average forecast accuracy, investors consider analyst forecasts to convey valuable new information during the pandemic,” Bilinksi wrote.

Bilinski was not available for comment by presstime.

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