Sell-Side Analysts Less Accurate in Bear Markets


There have been numerous studies which question the accuracy of sell-side research due to the optimistic bias associated with trying to win investment banking business.  However, some think this impact should disappear in bear markets, enabling sell-side research to be more accurate during these periods.  However, a recent academic study shows that sell-side research recommendations may be worse in bear markets than in bull markets.

New Study on Sell-Side Research Accuracy

There is a great deal of literature on the accuracy of sell-side research.  However, most studies ignore whether the state of the economy affects analyst performance.  Clearly, in recessions and crises there is greater uncertainty surrounding the prospects for public companies and there is greater volatility in their results.  Consequently, analysts’ ability to make sense of this uncertainty makes them even more important in bad times than in good times.

During the fourth quarter of 2013, Roger Loh of Singapore Management University and René Stulz of Ohio State University published an academic study called “Is sell-side research more valuable in bad times?” which evaluates sell-side analysts’ earnings forecasts, and the BUY or SELL recommendations they issued for the period 1983-2011.

Loh and Stulz found that sell-side analysts’ earnings forecast accuracy was worse in bad times than in good times and that they disagree more.  For example, analysts’ forecasts of a company’s profits for the next quarter were 46% less accurate during periods of financial crisis than at other times.

Potential Reasons for the Drop in Accuracy

Some might argue the reason that sell-side analysts are less accurate during bad times is because they are distracted by economic concerns which might lead them to seek new employment, thereby becoming less productive.  However, Loh and Stulz found that sell-side analysts actually produce more earnings and recommendation revisions during bad times than they do during good times, one measure that sell-side analysts actually work harder during bad times than good times.

Others suggest that the drop in analyst accuracy might be linked to cuts in research budgets. During downturns investment banks spend less on research, cutting staff and reducing compensation. For instance, in the most recent crisis sell-side research budgets were cut by around 40%, as firms replaced many experienced (and more expensive) analysts with younger, less expensive ones.

Analysts Opinions More Valuable in Bear Markets

Despite more inaccurate earnings forecasts, Loh and Stulz found that analyst revisions to earnings forecasts and stock recommendations have a more significant impact on stock-price movement during bad times than during other times.

The recent study found that during normal times only one in ten analyst recommendation changes results in moving the price of the share in question.  However, in falling markets this proportion increases to one in seven analyst recommendation changes moving the relevant stock price.  This is due to the increased uncertainty that exists during bad times and falling markets.


The study by Loh and Stulz finds that the accuracy of sell-side analysts’ earnings estimates and BUY SELL recommendations drops during difficult economic and bearish stock market conditions when compared to good times.  However, they also found that the uncertainty surrounding these difficult times prompts investors to place more importance on sell-side analysts’ forecasts in bad times.



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  1. There are a number of other reasons why sell-side research would be less accurate during weak economies that are not mentioned in this synopsis. First and foremost, most sell-side analysts are sort of “bull-market babies”. If you look at sell-side hiring patterns, most analysts begin their careers in bull markets. I would postulate that in bull markets, sell-side analysts do less critical thinking and more reporting and/or anticipating. So if young analysts are trained in bull markets, they are ill-prepared for the kind of obfuscations, misrepresentations, deceit, lies and sometimes outright fraud that is far more likely to happen in bear markets than bull markets. Second, the old saw that sell-side research is biased to the bullish due to investment banking is only half the story and maybe even the “smaller half”. The fact is, managements bias their access; plain and simple. So published sell-side research most probably reflects the more “sanitized” versions of analysts’ work, out of fear of losing access. Third, to the extent that the 2008 recession/crash was included in this study, any data the authors used might be biased simply due to the “fall off the charts” effect of the sharp and sudden decline in economic growth. Any analysis of general trends in bear markets should use “median” type of data, and the observances in the 4Q of 2008 and 1Q of 2009 should be dropped; in our own experience, we saw companies change their outlook literally weekly from 10/08 until 12/08. If managements couldn’t keep up with the disappearance of orders, how could analysts?

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