Private Interaction Between Firm Management and Sell-Side Analysts

The following post comes to us from Eugene Soltes of the Accounting and Management Unit at Harvard Business School.

In the paper, Private Interaction Between Firm Management and Sell-Side Analysts, which was recently made publicly available on SSRN, I investigate private interaction between sell‐side analysts and senior management by examining a set of internal records compiled by a large‐cap NYSE traded firm. Thousands of hours of senior management time are consumed speaking with sell‐side analysts annually at publicly traded firms. Despite this significant use of time, there is little academic evidence that directly examines these interactions. The analysis in this paper seeks to begin a dialogue to fill this gap.

I find that analysts who privately meet with management cover fewer firms, have less experience, and cover the sample firm for a longer period of time. These individual analyst characteristics dominate attributes of the firms they work for in explaining which analysts privately interact with management.

Evidence indicates that analysts who interact privately are more likely to create reports. I do not find that private interaction significantly improves the accuracy of analysts’ earnings estimates. Evidence also suggests that private interaction with management largely complements, rather than substitutes for, other means of public interaction such as quarterly conference calls.

The analysis in this paper is subject to several important limitations and caveats. Most significantly, the empirical data used for the analysis comes from one large‐cap NYSE traded firm. As a result, it is difficult to assess the external validity and generalizability of the results to other firms and other periods of time. Differences in both the management teams and analysts covering other firms could lead to different relationships between management and analysts. Despite these limitations, the analysis offers the first direct insight into these pervasive private interactions.

The full paper is available for download here.

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