Buy-Side Analysts and Earnings Conference Calls

The role of sell-side equity analysts in the capital markets has been researched extensively by academics over the past several decades. In contrast, due to data limitations, there has been little research on buy-side analysts. Buy-side analysts work for institutional investment firms and have different incentives and responsibilities than do their sell-side counterparts working at brokerage firms. That makes buy-side analysts not only worthy of study in their own right, but also makes it unclear whether the inferences and conclusions from the sell-side analyst literature also apply to buy-side analysts. While it is widely assumed that buy-side analysts conduct fundamental research and make stock recommendations to their firms’ portfolio managers, little is known about their research activities because they are not generally observable. In this paper, we use earnings conference call transcripts to identify buy-side analysts who participated (i.e., asked a question) in the calls to examine the factors associated with their participation, subsequent institutional trading, and capital market outcomes for the hosting companies.

Using a sample of 57,784 conference call transcripts for 3,418 companies from the second quarter of 2002 through the first quarter of 2009, we identify 3,834 buy-side analysts from 701 institutional investment firms who asked at least one question on 13,332 earnings conference calls. Our sample includes several of the buy-side analysts named in Institutional Investor magazine’s annual “Best of the Buy-Side” rankings, as voted by hundreds of sell-side analysts each year. The participation by these highly-respected buy-side analysts suggests that asking questions on a conference call can be part of their research and due diligence. Buy-side analysts ask questions in 23 percent of all earnings conference calls, over 3,000 conference calls have two or more buy-side analysts asking questions, 76 percent of the companies in our sample have had at least one conference call with buy-side participation, and buy-side analysts represent 5 percent of all questioners. Thus, although the vast majority of conference call participants are sell-side equity analysts, participation by buy-side analysts in earnings conference calls is fairly common.

In our first analysis, we test for the determinants of buy-side participation. Buy-side analysts have a variety of reasons to participate in a conference call. Our interviews with buy-side professionals indicate two: 1) to obtain or clarify information and 2) to influence the stock price. We posit that for either reason, buy-side analysts are more likely to participate in a conference call when a company’s information environment is poor and  its future performance is more uncertain. Consistent with this prediction, we find that buy-side analysts are more likely to participate when a company has lower sell-side analyst coverage and when there is greater dispersion in earnings forecasts made by sell-side analysts.

In our next analysis, we investigate whether conference call participation by buy-side analysts is indicative of their investment firms’ trading of the shares of the company hosting the conference call. Using pre- and post-conference call ownership data, we examine changes in quarterly institutional ownership to better understand whether investment firms tend to change their shareholdings in the quarters in which their buy-side analysts participate in the conference calls. We use a difference-in-differences approach with a control sample of the same firm-company pairs as the treatment sample (but for quarters without conference call participation). This design allows us to examine differences in ownership changes based on the same pairs of institutions and companies across quarters in which the key difference was participation in the conference call. We find that in the quarters in which a buy-side analyst participates in a company’s conference call, the employing institution is not only more likely to change its ownership, but also tends to change its shareholdings to a greater degree than in the quarters when their analyst does not participate in the conference call.

Finally, we test whether buy-side analyst participation is associated with company-level capital market outcomes, such as future absolute stock returns, trading volume, institutional ownership, and short interest. This is an empirical question, because one particular buy-side analyst participating in a call may be a proxy for broad buy-side interest, and management’s answer to a question may lead to correlated trading across many investment firms. Conversely, if the participating institution’s trading decision is based on private knowledge augmented with the public answer to a question on the conference call, and other institutions do not make the same (or any) trading decisions, then institutional trading will not be correlated. Our results indicate that there is an association, as the number of buy-side analysts participating on the conference call is positively associated with changes in share turnover, institutional ownership, and short interest.

We conduct several robustness checks and exploratory analyses. In one, we limited our sample to those with sell-side analyst coverage of six or fewer to address the concern of time constraints on conference calls. In another, we  limited conference calls to those near the beginning of a calendar quarter to increase the likelihood that quarterly changes in institutional ownership occur after the conference call. The results from these analyses yielded the same inferences as in our main results.

Our study contributes to the literature on buy-side analysts by highlighting earnings conference calls as one of their research activities, and by also highlighting the implications of their participation for the institutional investment firms that employ them and for the companies that host the conference calls.

This post comes to us from professors Michael J. Jung at New York University’s Stern School of Business, M.H. Franco Wong at the University of Toronto’s Rotman School of Management, and X. Frank Zhang at Yale University’s School of Management. It is based on their recent paper, “Buy-Side Analysts and Earnings Conference Calls,” available here.