Recommendation changes in walls of glass perceived roles and relative importance of direct contacts

Abstract: The equities recommendations of financial analysts to investors are often seen as mysterious created through skilled handcraft difficult to understand for the uninitiated. The core issue in this study is connected to the stock market functioning and the ability of analysts to disclose reliable and similar information to investors. The aim is to increase the knowledge of the sell-side analysts visible and invisible information processes in their work with critical situations of real life changes in recommendations, e.g. from “Buy” to “Sell”. Knowledge on how and why analysts change recommendations and how they work and use sources help to visualise the content of such recommendations. This PhD-thesis is based on two volumes; Volume 1, i.e. the Licentiate thesis, “Direct contacts between financial analysts and traded companies” and Volume 2 “Recommendation Changes within Walls of Glass – Perceived Roles and Relative Importance of Direct Contacts”. Volume 1 serves as a base for the second volume. According to Volume 1 direct contacts are vital to the analysts’ work. Volume 2 illuminates the role and relative importance of direct contacts in relation to usage of other sources. Data in a case study are from a large Swedish investment bank, collected through repertory grid interviews, documented changes, and limited observations. Principal component analyses are performed. Multiple perspectives are mapped using Kelly’s (1955) personal construct theory as the base. The analysts participating in this study help to construe their world. Analyses are performed from cognitive, socio-cultural, and financial perspectives on the individual, organisational, and market levels. Three dimensions appear to be central in the analysts’ work with recommendations, i.e. 1. “The scope of the analysts research”, 2. “The information ground”, and 3. Confidence in company information sources”. Inter-relational aspects connected to the concepts of trust, dependency, and access are critical for the work and the content of the recommendations. The findings suggest that the analysts adjust their work to the situation faced and that the content of the analysts’ recommendations is ambiguous. The analysts’ work, their roles, and the grey zone between official and private information connected to direct contacts are analysed in relation to the efficient market hypothesis on the semi-strong and strong levels. Models are developed to increase the knowledge behind the walls of glass of the analysts’ work and specifically their recommendations.