Preventing Stock Market Crises (V)
Regulating Information Manipulation by Sell-Side Analysts
Sell-side analysts possess potentially price-moving information gained through equity research. Its importance can be magnified by the publicity effect of a credible media outlet. The price-moving potential, the publicity it gains, and the credibility of analysts’ research and the disseminator define the value of sell-side-analyst-generated information. These are the three pillars of the information monopoly of sell-side analysts.
In the current chapter we present evidence that analyst-generated information has investment value, but mainly to informed investors by assisting them in their (often manipulative) trading strategies. It has marketing value to issuers. It misleads and could hurt uninformed investors. It also creates and frequently sets off mini-bubbles and long-term underperformance that are detrimental to investor protection, market stability, and even systemic security. In brief, sell-side analysts are often assistants or colluders in information-based manipulation. There are powerful measures targeting wrongdoing by sell-side analysts in extant securities regulations. Repeated regional and global financial crises indicate, however, that more research needs to be performed and effective remedies need to be provided targeting the trading around public release of analyst-generated information. ...