Corporate Finance Analysts' Independence Refers to the Case Study

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Corporate Finance

Analysts' independence refers to the ability of the analyst to publish opinions about the stocks they cover, free from corporate interference or oversight. In this pre-SOX example, analysts were under pressure from the investment banking arm of their parent company to run downgrades past management. The implication is that the analyst loses independence, that his or her views are going to be sterilized by senior management to avoid offending a current or potential future customer for some of the other services that the bank offers.

Maintaining a buy recommendation after a stock's price falls is not evidence that the analysts' independence is compromised. If the analyst thought the stock was undervalued before the drop, surely the analyst thinks the stock is still undervalued at the lower price point. The independence of an analyst cannot be judged on the basis of his or her recommendations.

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Independence is an input into the published research; it is not something that results from the research.

Houghton's memo explicitly threatens research independence by its very existence. That changes to recommendations must be passed through senior management prior to being published inherently eliminates independence by the very definition of independence. The buy side is the buyer of research, the sell side is the company that produces the research. Buy side firms might want second opinions and therefore have a need for sell side research reports. The problem is that many buy side clients do not conduct their own research. Mr. Barkocy's criticism is fair. If sell side firms are warning companies of potential downgrades, that infringes upon analyst independence. The buy side then cannot trust in the research that is published. The sell side might ignore such criticism if it makes more money doing….....

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