What is the Value of Analyst Research?

Abstract

We estimate the value of equity analyst research motivated by regulatory changes such as MIFID II, which unbundles equity research and trading functions. We find that changes in target prices (CTPs) of equity analysts even as early as 120 days before a rating change can accurately predict actual credit rating changes of all rating agencies in the United States and Europe, even during a financial crisis. The accuracy of CTPs as a predictor of credit rating actions is as high as 78% even after controlling for actual stock price changes in predicting these rating actions, and this finding is robust to outlook and watch-list effects. For our sample of firms that had a credit event, we estimate the value of analyst research on average to be about 15.5 billion $ for a downgrade and about 5.2 billion $ for an upgrade. Unconditionally, we estimate the value of analyst research to be about 1.8 billion $ when the CTP predicts a future decline in stock prices and about 1.1 billion $ when the CTP predicts a future increase in stock prices. We conclude that the economic value of analyst research is indeed sizable, contrary to the conclusions of most of the extant literature.