Do Connections with Buy-Side Analysts Inform Sell-Side Analyst Research?

Abstract

Prior research suggests that private information developed by an institutional investor’s buy-side analysts becomes public only through observation of fund manager trading decisions. We identify another pathway. Specifically, we hypothesize that buy-side analyst connections with sell-side analysts offer the sell-side a view of the buy-side’s private information, thus enhancing the quality of sell-side research output. We proxy for these connections with the weighted number of stocks at the intersection of stocks held in the portfolios of institutional investors and followed by the sell-side analyst. The larger this intersection, the more opportunities the sell-side analyst has to interact with institutional investors. We proxy for the research quality of the sell-side analyst with her earnings forecast accuracy. We find that such connections enhance the accuracy of earnings forecasts, but up to a point of diminishing returns. Additional tests rule out reverse causality and omitted variables as explanations for the association and strengthen the inference that connections between sell- and buy-side analysts increase the flow of information and improve the quality of sell-side research output.