So That's Why They Always Criticize Stock Analysts....

Posted by: Jena McGregor on August 8, 2008

It’s not surprising, perhaps, but I’m always amused with how many CEOs are quick to criticize stock analysts and their short-term views of their stocks. That may be true, but if new research by professors from Rice University and the University of California, Irvine is correct, there may be another underlying reason. At the Academy of Management’s annual meeting next week, research will be presented by Margarethe F. Wiersema and Yan (Anthea) Zhang about the influence analysts have on CEO dismissals.

According to the authors, the influence of analyst ratings on boards and CEO dismissals increased dramatically post-2002, when new independence rules were set up following the dot-com scandals. Before the scandal, a CEO whose firm had a mean rating of 2.7 (one point below the average on a five-point scale) would have a 3% chance of being dismissed within six months. After the new rules were introduced in 2002, that CEO would have a 7.9% chance of dismissal.

That was surprising to the researchers, especially since stock analysts became the butt of many business world jokes following their insanely high ratings on companies that couldn’t even eke out a profit. “Given the crisis in confidence that the securities industry experienced, we expected to find that analysts’ influence would have diminished,” Prof. Wiersema commented in a press release.

 

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