Buy‐Side Analysts and Earnings Conference Calls

• Author: M. H. FRANCO WONG,X. FRANK ZHANG,MICHAEL J. JUNG
• DOI: http://doi.org/10.1111/1475-679X.12180
• Date: 01 June 2018
• Published date: 01 June 2018

DOI: 10.1111/1475-679X.12180

Journal of Accounting Research

Vol. 56 No. 3 June 2018

Printed in U.S.A.

Buy-Side Analysts and Earnings

Conference Calls

MICHAEL J. JUNG,

∗M. H. FRANCO WONG,

†

AND X. FRANK ZHANG

‡

Received 22 October 2015; accepted 30 June 2017

ABSTRACT

Companies’ earnings conference calls are perceived to be venues for sell-side

equity analysts to ask management questions. In this study, we examine an-

other important conference call participant—the buy-side analyst—that has

been underexplored in the literature due to data limitations. Using a large

sample of transcripts, we identify 3,834 buy-side analysts from 701 institutional

investment firms who participated (i.e., asked a question) in 13,332 confer-

ence calls to examine the determinants and implications of their participa-

tion. Buy-side analysts are more likely to participate when sell-side analyst cov-

erage is low and dispersion in sell-side earnings forecasts is high, consistent

∗Stern School of Business, New York University; †Rotman School of Management, Univer-

sity of Toronto; ‡School of Management, YaleUniversity.

Accepted by Christian Leuz. We thank Mark Bradshaw, Larry Brown, Ling Cen, Nathan

Dong, Paul Fischer, Trevor Harris, Paul Healy, Daehyun Kim, Stan Markov,Dawn Matsumoto,

Greg Miller,Annie Loo Muramoto, Bill O’Dell, Elizabeth Hill Shah, Eugene Soltes, Nan Yang;

two anonymous reviewers; and workshop participants at New York University, University of

Toronto,Hong Kong Polytechnic University, Southern Methodist University, George Washing-

ton University, Columbia University,University of Hong Kong, the Haskell & White Corporate

Reporting & Governance Academic Conference, the 2016 AAA FARS mid-year meeting, and

the 2016 European Accounting Association Annual Congress for their helpful suggestions and

comments. We also thank the buy-side analysts, portfolio managers, and investor relations of-

ficer who we interviewed. We gratefully acknowledge Thomson Reuters for granting access to

the StreetEvents conference call transcript database. We also acknowledge financial support

from New York University, the CPA Ontario Professorship in Financial Accounting, Univer-

sity of Toronto, and Yale University. An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

913

Copyright C, University of Chicago on behalf of the Accounting Research Center,2017

914 M.J.JUNG,M.H.F.WONG,AND X.F.ZHANG

with buy-side analysts participating when a company’s information environ-

ment is poor. Institutional investors trade more of a company’s stock in the

quarters in which their buy-side analysts participate in the call. Finally, we find

evidence that buy-side analyst participation is associated with company-level

absolute changes in future stock price, trading volume, institutional owner-

ship, and short interest.

JEL codes: G10; G30; M41

Keywords: buy-side analysts; institutional investors; sell-side analysts;

earnings conference calls

1. Introduction

The role of sell-side equity analysts in capital markets has been

researched extensively by academics over the past several decades

(Bradshaw [2011]). In contrast, due to data limitations, there has been little

research on buy-side analysts. Buy-side analysts work for institutional invest-

ment firms and have different incentives and responsibilities compared to

their sell-side counterparts working at brokerage firms (Groysberg, Healy,

and Chapman [2008]), which makes buy-side analysts not only worthy of

study in their own right, but also makes it unclear whether the inferences

and conclusions from the sell-side analyst literature are generalizable to

buy-side analysts.1While it is widely assumed that buy-side analysts conduct

fundamental research and make stock recommendations to their firms’

portfolio managers, little is known about their research activities because

they are not generally observable. In this paper, we use earnings confer-

ence call transcripts to identify buy-side analysts who participated in the

calls and to examine the factors associated with their participation, subse-

quent institutional trading, and capital market outcomes for the hosting

companies.

Throughout this paper, we refer to “participation” as asking at least one

question during a company’s conference call because we cannot observe

analysts (buy-side or sell-side) who merely listen during the call or who

wanted to ask a question but were not selected by management (Mayew

[2008]). As such, with our interest in understanding the prevalence of buy-

side analysts in companies’ earnings conference calls, we likely underesti-

mate buy-side interest in absolute terms and possibly relative to sell-side

interest, depending on the propensity of each type of analyst to want to

ask, and be selected to ask, a question. Notwithstanding this limitation, we

examine observable buy-side participation to shed light on its importance

as one of the activities performed by buy-side analysts. We also test predic-

tions about whether buy-side analyst participation is related to a company’s

1Throughout this paper, we use the terms “firm” and “institution” when referring to an

institutional investment firm that employs a buy-side analyst and the term “company” when

referring to a company that hosts an earnings conference call.

BUY-SIDE ANALYSTS AND EARNINGS CONFERENCE CALLS 915

information environment, trading in the company’s stock by the participat-

ing analyst’s investment firm, and company-level capital market outcomes.

Two working papers that we later discuss in more detail also identify buy-

side analysts from earnings conference call transcripts to examine factors

associated with their participation and capital market outcomes (Cen, Das-

gupta, and Ragunathan [2011], Call, Sharp, and Shohfi [2016]).2However,

there is still relatively little research on buy-side analysts compared to a vo-

luminous literature on sell-side analysts.

Using a sample of 57,784 conference call transcripts for 3,418 compa-

nies from the second quarter of 2002 through the first quarter of 2009, we

identify 3,834 buy-side analysts from 701 institutional investment firms who

asked at least one question on 13,332 earnings conference calls. Our sam-

ple includes several of the buy-side analysts named in Institutional Investor

magazine’s annual “Best of the Buy-Side” rankings, as voted by hundreds

of sell-side analysts each year.3The participation by these highly respected

buy-side analysts suggests that asking questions on a conference call can be

part of their research and due diligence. Buy-side analysts ask questions in

23% of all earnings conference calls, over 3,000 conference calls have two

or more buy-side analysts asking questions, 76% of the companies in our

sample have had at least one conference call with buy-side participation,

and buy-side analysts represent 5% of all questioners. Thus, although the

vast majority of conference call participants are sell-side equity analysts, par-

ticipation by buy-side analysts in earnings conference calls is fairly common.

In our first analysis, we test for the determinants of buy-side participation.

Buy-side analysts have a variety of motives to participate in a conference call.

Our interviews with buy-side professionals indicate two general reasons:

(1) to obtain or clarify information and (2) to influence the stock price

(discussed further in section 2). We posit that, for either reason, buy-side

2Call, Sharp, and Shohfi [2016] superseded Shohfi [2014]. Another study of the confer-

ence call setting that includes buy-side analysts is Heinrichs, Park, and Soltes [2015], which

uses proprietary data on institutional clients of Thomson Reuters who accessed audio record-

ings and transcript records of earnings conference calls to shed light on the different types of

market participants who “consume” the calls. They find that 57% of timely consumers (those

who access on the day of the call) are buy-side analysts and slightly more than half of them do

not own the company’s stock prior to the call (as of the most recent calendar quarter-end).

While their findings are consistent with the other studies that illustrate general buy-side in-

terest in earnings conference calls, the authors note that analysts typically dial a telephone

number provided by a conference call vendor (e.g., Intercall, BT Conferencing, ACT Confer-

encing, etc.) to participate (i.e., ask a question). Therefore, reasons for buy-side analysts to

access a call (through Thomson Reuters) may not be the same as those for them to participate

in a live call.

3There were 35 buy-side analysts from 17 investment firms voted as the “Best of the Buy-

Side” between 2003 and 2008. Wefind that eight of these analysts are in our sample of earnings

conference call transcripts. One of them is described as having little time to waste because he

covers 55 companies; the time and effort he allocates to listen and participate in a company’s

earnings conference call suggests that conference call participation is not a trivial task (Martin

[2005]).