One good reason why it pays to be a nice equity analyst

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“Great quarter guys.” If you’ve ever been on an earnings calls you’re bound to hear it, unless of course the quarter was an absolute dumpster fire. The common idiom was uttered 26 separate times between July 1 and August 15 in 2012, for example. Each time it’s same person using the phrase, right before they ask a relatively benign question of the company’s CEO or CFO: the equity analyst.

Now that’s not to say all equity analysts are pushovers. Just look at Mike Mayo of CLSA. He’s an animal – always asking tough questions and pushing for banks to undergo major restructuring. But others ask softball questions and have been known to treat some companies with kid’s gloves.

All that makes a new paper from UCLA’s Ben Lourie so compelling. The research, well summarized by Business Insider, looks at the potential conflicts of interest facing equity analysts – people who need access to the very companies (and executives) that they cover. No one wants to chat with a person who they despise, hence the gratuitous “great quarter guys” icebreaker.

What Lourie found was rather amazing. He discovered a pattern of equity analysts taking jobs at companies that they used to cover. Moreover, he found that those who did were statistically much more likely to have had higher price targets on their stock, were more pessimistic about competitors and wrote more reports on the firm than other analysts the very year before making the move.

"The findings raise concerns about their independence and indicate a potential benefit to tightening employment regulations in this industry,” Lourie wrote, according to Business Insider.

On the surface, companies hiring friendly analysts who cover their stock doesn’t make that much sense. Those people would still need to provide a service, and hiring someone away from a role where he or she lauds your business publicly feels like a negative for the firm.

But Lourie found something else. Companies that hire former analysts who used to cover their company as investor relations executives tend to beat their consensus forecasts for each quarter, suggesting those analysts-turned-investor relations execs may have some sway with their old colleagues who put together the original forecast.

Or maybe it’s all coincidence.

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Quote of the Day: “I look for the type of guy in London who gets up at 7 o’clock on Sunday morning when his kids are still in bed and logs onto a poker site so that he can pick off the U.S. drunks coming home on Saturday night,” Platt said. “I hired a guy like that. He usually clears 5 or 10 grand every Sunday morning before breakfast.” – BlueCrest’s Michael Platt

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