11 - Independent equity research and management risk

Abstract

This chapter presents a discussion on independent equity research and management risk. The goal of equity research is provide strategic and tactical reasons for investments and disinvestments in equities, bonds, or other instruments. To gain its readers' confidence, financial analysis should make explicit how it collects information, as well as which factors and distortions influence the search that is made. It should also focus on end-user expectations, trade-off attributes, and the understanding of the analyzed company's product and market strategy. An integrated equity research program is closely supervised by the board of directors, CEOs, and their immediate assistants. It should include both quantitative and qualitative criteria—such as product and market strategy. Effective forward-oriented communication of an entity's strengths and weaknesses requires a company-wide view based on personal appreciation by the analysts of board members or CEO. Furthermore, investor misinformation because of conflicts of interest and other reasons involved in equity research and analysis has raised the issue of the existence of a new type of legal risk.