The equity analyst rating decision:a strong structuration analysis

Abstract

Sell-side analysts represent something of an enigma; the literature suggests they are optimistic and conflicted in their stock recommendations, yet these same stock recommendations impact share prices and so are clearly important for capital markets. To unlock and explore this conundrum, this study conceptualises stock recommendation decisions as primarily social in nature. Consequently, this situates the research outside of the predominantly neo-classical economic model reflected in the mainstream analyst literature. Giving voice to the sell-side analyst participants was central to the study. It explored their experiences of making decisions in the midst of a complex, changing social environment.Based on a field study, the empirical evidence was collected from focus groups and semistructured interviews with sell-side analysts. Semi-structured interviews were extended into the analysts’ network to include internal clients, external investment managers and corporate officials. Strong structuration theory was drawn upon extensively through every stage of the research as a revealing lens to sensitise the researcher to the structural and agential aspects of analyst practices, with a specific focus on rating decisions. The findings suggest that regulatory tightening over the last decade has created an independent causal external structure that materially constrains and transforms the practices of sell-side analysts. Power dynamics, the levying of sanctions, a diverse analyst habitus and the exercise of resistance all remain integral to understanding company-analyst relations and action. Fieldwork evidence reveals that the sales force, largely ignored in the mainstream literature, represents a powerful agent cluster in close time-space proximity to analysts. By viewing the conduct of analysts as the outcome of cycles of structuration, further light can be shed on the low level of sell recommendations in the market, the use of calculative routines to legitimise ratings and the capitulation point, whereby an analyst abandons a poorly performing stock call.