Sell-side financial analysts produce, acquire, and disseminate information, playing an important intermediary role in capital markets. Such analysts typically work alongside other analysts in brokerage houses. However, there is only limited understanding of how they collaborate, as most studies have treated financial analysts as isolated figures. HKUST researchers Allen H. Huang and Amy Y. Zang and their colleague argue that information sharing between analyst colleagues is a valuable organizational resource for brokerage houses. They fill an important gap in the research by studying the performance of analysts and their colleagues who cover economically related industries.
It is vital for organizations to be able to solve coordination problems between employees so that workers do not have to acquire all of the knowledge needed to fulfil their roles themselves. This is particularly important in knowledge-intensive firms such as brokerage houses, the researchers say, because the production of high-quality research “requires coordination of knowledge acquisition and communication.”
Such coordination enables analysts to “focus on collecting the most relevant information for their industries while accessing the broader knowledge needed to produce high-quality research and services from colleagues,” the researchers argue. By this logic, the researchers say, a portion of analysts’ performance is attributable to their organizations, and thus, to a certain degree, their research quality and reputation are not transferable across employers.
Access to complementary information about related industries from their colleagues should enable analysts to focus more effectively on their own industries, the researchers argue. They therefore hypothesized that an analyst would benefit more from information-sharing with colleagues who covered industries that were economically connected to the analyst’s own industry.
The researchers measured the economic connectedness between an analyst’s industry and their analyst colleagues’ industries. Using Benchmark Input–Output data from the Bureau of Economic Analysis, they examined information sharing between these analysts and evaluated their performance in terms of earnings forecast accuracy and stock recommendation profitability.
Consistent with their hypothesis, the researchers found that organizational resources are vital to analysts’ production of high-quality information. In particular, analysts with greater information
complementarity with their colleagues issued more accurate earnings forecasts, made more profitable stock recommendations, triggered greater investor reactions with their earnings forecast revisions, and were more likely to have an Institutional Investor All-Star ranking. This was especially the case when the analysts’ colleagues produced higher-quality research.
In further analyses, the researchers found that “analysts with economically connected colleagues tend to have a higher level of industry specialization,” which indeed enables them to focus more effectively on their own industries.
The researchers contribute to the literature by finding that analysts can facilitate the flow of information between industries through collaboration with their colleagues. The novel finding that analysts rely on organizational resources to produce high-quality research has important implications for brokerage houses and other knowledge-intensive firms. By encouraging information sharing between employees, the researchers conclude, “such firms can create competitive advantages that benefit employee performance.” In addition, the researchers say, these firms will be better able to retain their talent, as their employees’ performance and reputation will be less transferable to other firms.