Background & Importance of Equity Market Research
Equity research has gained a lot of popularity ever since the Wall Street crumbled down in 2008. The deep recession in the recent periods has brought up question about the capability of equity research studies. On the other hand, equity research has turned out to be serious tool for avoiding economic recession through consistent market research. Experts do not only get involved in providing information to the investors but supply the market with dependable financial inputs. These types of inputs help in shifting the market in proper direction. It only occurs when market participants make prudent decision. Stocks are typically better interpreted with the researcher’s recommendations (Manuel, 2001).
Any type of research forms the very foundation of every organization’s composition and planning. Companies and firms make investments considerable time and money in research-oriented exercises designed to oversee market trends, shifting lifestyles, mapping prospective options and threats and so on. Researching becomes much more important in case of stock investing and investment where the capital endowed is frequently subject to substantial fluctuations. This is again one reason why equity research is attaining more and more significance (Davis, 2009). In fact, investment research companies that perform equity research expert services provide plenty of attention to this factor because of its immediate relation to the bull and bear market as well as the increased importance of equity in stock investing along with related activities (CFA Institute, 2012).
What is and Why Paid-for Independent Research?
Paid-for or issuer-paid independent equity research is research offered by organizations which do not have any kind of investment banking or other consultancy interactions with the company that is the subject matter of the report and the researching specialist is rewarded by the subject company. Since the independent research service has no investment banking connection with the subject company they have no interest to write the research reports in such an easy way to generate trading commissions. The end result is that equity analysis prepared by unbiased research providers will be neutral and objective.
Consequences of not Having Equity Research
Lack of research plan for smaller public corporations is risky both to the companies and to the investing community. This is best explained in the above mentioned advisory committee’s report in the following terms:
Companies without any independent analyst cover have a lower market capitalization as compared to companies that do possess such cover, and are susceptible to higher capital costs as compared to their analyst-covered competitors;
A lack of cover by independent professionals limits shareholders’ as well as potential shareholders’ ability to acquire an informed outsider’s perspective on determining strong points and weak points and spots for improvement ;
The lack of research analysis decreases the entire “mix of information” presented to investment bankers , fund managers and private investors , which make up the markets considerably less efficient ; and
Because analyst reports activate the selling and buying of shares, the absence of such reports frustrates the formation of a strong trading market. Fees for Independent Equity Research
What is an Equity Research Report?
Typically the equity research reports also referred to as securities research reports is a report prepared by a independent brokerage firm or firms other business professionals for its clients, the main purpose of which is to help their investors to reach reliable investment decisions in a shares of the issuer company. An equity research report contents include a detailed analysis of the company, industry in which the company operates and provides other sufficient financial and non-financial information, like comparisons, analytics etc. based on which an investor can take a prudent decision.
Content of the Equity Research Report
The content of report typically cover the following areas –
- Company Overview
- Key Highlights
- Industry Snap Shot
- News Analysis
- Financial Analysis
- Risk Factors
- Valuation Methodology
- Investment rationale
- Information of Directors, CEO etc.
The above contents are almost present in all the equity reports. But there are no so hard and fast regulations governing the formats minimum information requirement etc. The form and content varies from type of company and legal status. There could be more work in the report in case of listed companies. Finally, the report provides suggestions about a target price based on the results of a complete analysis.
Disclaimer in the Report
- a) A statement disclaiming that the report includes the views and opinions of the analyst;
- b) The researcher or analyst does not have type of interest in the company.
- c) Remuneration is not linked with any specific recommendation and suggestion included in the report.
Fees for Equity Research Report
All the reports of the equity research experts communicate that they have been compensated a fee by the issuer (or, in some cases, by the investor or Broker Company). Before such experts start working on research on a company, they demand payment at first in the form of cash. Payment in the beginning in cash (or post-dated cheese in a minority of situations) is important to ensure that the company cannot withhold cash if it is disappointed with the observations and conclusions of a research report. Moreover, it is generally believed that a researching firms are not able to preserve an analyst’s independence when they holds equities or stock option in an issuer it is researching. In the times of 2003-04, it was that noticed a number of firms rejected offers to accept shares and stock option in consideration of research. During the 2008–09 economic recession, many firms across US changed their customer policies, and researching firm were found to be disclosing the fact that they received compensation in the form of shares and options (Steven et al, 2009).
Advantages to the Investors
It is also very important to understand the exact advantages and disadvantages of the research report. Although issuer-paid firms are making a lot of progress, there is a lot of work to be done in relation to teaching the public about the features of credible and non-credible issuer paid firms (or any form of research service) and getting such firms to run under consistent standards (Wright, 1997).
Distancing credible and non-credible issuer-paid firms is obviously extremely important. Marcus Kirk, assistant professor at University of Florida’s Warrington College of Business Administration, analyzed the question of whether or not companies can buy reliable analyst research and came to the conclusion that “results are most effective for fee-based research firms with ex ante policies that decrease potential conflicts of interest and raise credibility” (Bruno, 1984).
Nevertheless, the principal requirement for unbiased equity research both from the investors’ viewpoint and from the issuer’s viewpoint is in the small cap and micro-cap sectors of the equity market. Because of recent consolidations in the brokerage market, conventional analysts’ research report is concentrated in the hands of just a few biggest brokerages firms; and these leading brokerage firms main interests are in the large cover companies resulting from investment banking dealings and exchanging commissions (CFA Institute, 2012).
Reference List
Chlistalla, Michael and Marco Lutat, 2011, Competition in securities markets: the impact on liquidity, Financial Markets and Portfolio Management 25(2), 149-172.
CFA Institute, 2012, Dark pools, internalization, and equity market quality.
Wikipedia “Securities Research“
Tyebjee, Tyzoon T., & Bruno, Albert V. (1984a). A Model of Venture Capitalist Investment Activity. Management Science, 30(9), 1051-1066.
Wright, Mike, Hoskisson, Robert E., Busenitz, Lowell W., & Dial, Jay. (2000). Entrepreneurial Growth Through Privitization: The Upside of Management Buyouts. Academy of Management Review, 25(3), 591-601.
Wright, Mike, & Robbie, Ken. (1997). Venture capital: Dartmouth Pub Co.
Trajtenberg, Manuel. (2001). Innovation in Israel 1968- 1997: a comparative analysis using patent data. Research Policy, 30(3), 36
Davis, Steven, Haltiwanger, John, Jarmin, Ron, Lerner, Josh, & Miranda, Javier. (2009). Private equity, jobs and productivity. The Global Economic Impact of Private Equity Report, 25-46.
Djankov, Simeon, McLiesh, Caralee, & Shleifer, Andrei. (2007). Private Credit in 129 Countries. Journal of Financial Economics, 84(2), 299-329.
