Understanding Research Reports
A research report is a document prepared by an analyst or strategist who is part of an investment research team in a stock brokerage or investment bank. A research report may focus on a specific stock or industry sector, a currency, commodity, fixed-income instrument, or even a geographic region or country. These reports often contain actionable recommendations, such as investment ideas that investors can act upon.
The Essence of Research Reports
Research reports originate from various sources, including market research firms and in-house departments at sizable organizations. Within the investment industry, the term commonly refers to sell-side research, meaning investment research produced by brokerage houses.
This type of research is distributed to the institutional and retail clients of the brokerage that creates it. On the flip side, research generated by the buy-side, encompassing pension funds, mutual funds, and portfolio managers, is generally reserved for internal use and not shared with external parties.
Financial Analyst Research Reports
Financial analysts often draft research reports to support specific recommendations, such as whether to buy or sell a particular security or whether a client should consider a specific financial product. For instance, an analyst might produce a report about a new offering proposed by a company. This report could contain vital metrics about the company, including years of operation, key stakeholders, and current market statistics. Additionally, it may cover aspects like overall profitability and the intended use of raised funds.
The Impact of Research Reports
Advocates of the Efficient Market Hypothesis (EMH) might argue that the value of professional analysts’ research reports is questionable and that investors frequently place undue confidence in their conclusions. While drawing a conclusive result on this topic is challenging due to imprecise comparisons, some empirical evidence supports the value of such reports.
For instance, one study explored the market for India-based investments and the analysts covering them. Published in the March 2014 edition of the International Research Journal of Business and Management, the paper concluded that analyst recommendations indeed impact and benefit investors, particularly for short-term decisions.
Navigating Conflicts of Interest
While some analysts are unaffiliated, others may be directly or indirectly linked with the companies they cover. Independent analysts typically perform objective research to derive an unbiased recommendation and may have limited concern about the outcome.
Conversely, affiliated analysts might strive to ensure research reports highlight clients positively. Furthermore, if an analyst is also an investor in the company they report on, they might have a personal incentive to avoid issues that could lower the valuation of the securities they hold.
Related Terms: analyst, investment bank, market research, brokerage, portfolio managers.
