Companies’ earnings conference calls are perceived to be venues for sell-side equity analysts to ask management questions. In this study, we examine another important conference call participant—the buy-side analyst—that has been underexplored in the literature due to data limitations. Buy-side analysts work for institutional investment firms and have different incentives and responsibilities compared to their sell-side counterparts working at brokerage firms, and little is known about how they gather information because their research activities are not generally observable. We are interested in understanding the prevalence of buy-side analysts in companies’ earnings conference calls and the reasons they participate in the calls. We also test predictions about whether buy-side analyst participation is related to a company’s information environment, trading in the company’s stock by the employing institution, and company-level price discovery.
First, using a sample of 57,784 conference call transcripts from the second quarter of 2002 through the first quarter of 2009, we identify 3,869 buy-side analysts from 708 institutional investment firms who asked at least one question on 13,411 earnings conference calls. Our sample includes some of the largest investment firms in the U.S. (e.g., Blackrock, Fidelity, Wellington, and T. Rowe Price) and several of the buy-side analysts named in Institutional Investor magazine’s annual “Best of the Buy-Side” rankings. We find that buy-side analysts ask questions in 23% of all earnings conference calls, over 3,000 conference calls have two or more buy-side analysts asking questions, 77% of the companies in our sample have had at least one conference call with buy-side participation, and buy-side analysts represent 5% of all questioners. Thus, while the vast majority of conference call participants are sell-side equity analysts, participation by buy-side analysts in earnings conference calls is not uncommon.
Second, we examine why these buy-side analysts participate in conference calls. We posit that buy-side analysts take a more active role in acquiring information when the company’s information environment is poor and its future performance is uncertain. Consistent with this prediction, we find that buy-side analysts are more likely to participate when a company has lower sell-side analyst coverage and when there is greater uncertainty in earnings forecasts made by sell-side analysts.
Third, we investigate whether conference call participation by buy-side analysts is indicative of their investment firms’ trading of the shares of the company hosting the conference call. We find that institutions with participating analysts on the conference call are more likely to change their ownership compared to the control group of institutions without buy-side analyst participation. In addition, institutions with buy-side analyst participation increased or decreased their shareholdings to a greater degree compared to the control group. We interpret our results as suggesting that institutions and their buy-side analysts view conference calls as a useful channel to gather or clarify information to update their research and that buy-side analysts’ participation is associated with institutions’ trading in the company’s stock.
Fourth, we test whether buy-side analyst participation is associated with company-level stock prices. Our results indicate that there is an association, as the number of buy-side analysts participating on the conference call is positively associated with absolute changes in share turnover, absolute changes in institutional ownership, and absolute changes in short interest.
Finally, we examine certain characteristics of the questions that buy-side analysts ask. Compared with sell-side analysts, buy-side analysts 1) tend to ask, on average, slightly more questions, 2) their questions are shorter, 3) their tone of questions are similar, and 4) they elicit shorter responses from the hosting company’s CEOs and CFOs. While there could be several explanations for these differences, we believe that buy-side analysts tend to ask more pointed or focused questions that elicit more focused answers from management.
This study contributes to the literature by examining the role that buy-side analysts play in the capital markets, an area underexplored in the literature. Using a broad sample of transcripts of earnings conference calls, we highlight that: 1) participation by buy-side analysts is not uncommon; 2) buy-side analysts are more likely to participate when the company’s information environment is poor; 3) buy-side analyst participation is indicative of trading by their investment firms; and 4) buy-side analyst participation is associated with company-level stock market outcomes.
Michael J. Jung is an Assistant Professor of Finance at the NYU Stern School of Business.
M.H. Franco Wong is a CPA Ontario Professor of Financial Accounting at the Rotman School of Management, University of Toronto.
X. Frank Zhang is a Professor of Accounting at the Yale School of Management.