Analysts and the problem of “sell”

HONG KONG (Reuters) – More than a decade after regulators moved to clean up the stock research industry at investment banks, analysts across the globe are as hesitant as ever to issue negative research on companies they believe are destined to struggle.

While so-called “Chinese walls” were set up after regulators and legal cases shed light on the role analysts and bankers played in inflating the 1990s technology bubble, research teams still appear conflicted between their conviction and their bank’s client list.

A mere 9 percent of analyst recommendations by investment banks and brokerage firms globally are a “sell” right now, based on 120,029 recommendations issued on nearly 17,000 companies, according to a Reuters study of StarMine data.

Ten years ago, sell orders jumped to nearly 20 percent after a series of rules were put into place to wipe out banker-analyst conflicts. It’s now back in the single digits, and in some cases headed to levels last seen in the 1990s.

“Research is associated, rightly or wrongly, with an organization and if somebody puts out a sell recommendation people don’t like that,” said David Baran, co-founder of Tokyo-based hedge fund, Symphony Financial Partners.

An analyst with a negative view on a stock will often prefer to keep that belief tight, fearing pressure from top bankers seeking business from the company or being shut out by its senior executives.

“In general it’s difficult for a lot of the analysts who could be negative or negatively biased on a company and expect to see them welcome at the next investor meeting or get access to the management,” said Baran.