Near the Corner of Church and State (Update)

Efforts to insulate sell-side analysts from investment bankers will hurt some capital-raisers, but help others.

Others also believe that, if research becomes more independent, CFOs will feel less pressure to meet what are often overly ambitious consensus estimates. “I think there is going to be a very different attitude among CFOs,” says A. Gary Shilling, head of the eponymously named research company. “They will be able to tell analysts ‘read the quarterly reports and come to the annual meetings. Otherwise don’t bother me.’”


The prospect would probably have some CFOs skipping rope and making large donations to charitable institutions.

The fact is, although buy-side analysts have largely discounted Wall Street’s recommendations (and their expected earnings numbers), individual investors have typically relied on the Street’s information when picking stocks.

Indeed, Wall Street forecasts still set the market’s expectations on earnings. “If the majority of skeptical investors begin to discount Wall Street’s earnings expectations,” asserts Shilling, “then whether EPS comes in at $1.20 or $1.30 won’t make much difference.”

Reduced pressure to meet earnings projections, in turn, may lessen the temptation to resort to accounting gimmicks. “Behind the penny-miss notion, was the perception that companies should have enough reserves or be able to manipulate the numbers enough to make up a penny,” notes Thompson. “If they couldn’t, it meant they had serious problems.”

Wall Street analysts may still have serious problems. If analyst coverage becomes less valuable to investment banks, critics say non-tied research firms (such as Sanford Bernstein) could emerge as forces in the capital markets.

“There are already indications that the buy-side is willing to finance independent research,” notes Thompson, “and individual investors might very well be willing to pay a few more cents in commissions to get unbiased information.”

At that point, managers at Wall Street investment houses might begin to wonder why they’re even in the research game. “I don’t know if the firms will get out of the research business altogether,” says Thompson. “But there will be some serious cutbacks.”


According to a published account, the National Association of Securities Dealing (NASD) is preparing to take regulatory action against Salomon Smith Barney and its star telecom analyst, Jack Grubman.

Apparently, officials at NASD believe Grubman may have helped Salomon Smith Barney win business from Winstar Communications Inc. by recommending that investors buy shares of the telco, which filed for bankruptcy in April 2001. A Salomon Smith Barney spokeswomen denies that Grubman ever intended to mislead investors.


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