A Sea Change in Equity Research
The lack of integrity and objectivity in some research departments in the late 1990s is still causing widespread shifts in this and other related industries, and probably will for quite some time to come. Much of the economic reorganization of the investment banking and equity research industries has come as a direct result of the backlash stemming from unethical analysts and research departments, and their exposure during the recent bear market for U.S. traded stocks. Harbinger Research exists as a result of these changes in the industry.
Why be objective?
Clearly, for equity research to be of value to the market as a whole, equity analysts must hold themselves to the highest standards of personal and professional conduct. As AIMR members and in most cases as CFAs, we at a minimum hold ourselves to AIMR’s Code of Ethics and its Standards of Professional Conduct.
But isn’t it financially in our best interest to always say something positive?
In addition to believing in integrity and honest communications as individuals and as professionals, we also believe it is in our best interest financially to maintain a strict objectivity in our research. Although such objectivity may mean we miss out on a new client from time to time, in the end it will build a high level of Street credibility for us. This credibility will in turn make our research much more impactful in the financial markets, enhancing its value to all enrolled companies, and to us as well. Therefore, we see maintaining a strict research objectivity to be in our own best interest, as well as being consistent with our personal beliefs.
We are 100% uncompromising in this regard: public companies or their investors can purchase research coverage, but they cannot under any circumstances purchase an investment rating.
"Distribution of Ratings" – How Does This Apply to Harbinger Research?
The conventional wisdom states that you can tell how objective a research department is based on how its ratings are distributed; the implication being that departments and firms that only rate companies positively must not be very objective. However, we believe this logic is flawed, and is inapplicable to a company like ours. Here’s why.
In many cases, the enrolling company will be the purchaser of our research coverage, and it is a business reality that corporate executives are not likely to be happy paying us to say their stock is overvalued. Because of this business reality, we allow paying companies to opt-out of coverage once we have completed our research, but before we write our initial report and initiate coverage. This allows us to maintain research objectivity without creating an unhappy customer base. It also creates a structural bias to the companies we have under coverage – we are unlikely to be hired by companies that believe they are overvalued, and hence it is natural that most of the companies we cover will be rated Neutral or better.
The notable exception to this is when we are hired by one or more investors to research a company they believe to be clearly overvalued. If we agree, we will initiate coverage on that company with a Sell or Strong Sell rating, and as that company is not the purchaser of our services, we will not offer them an opt-out opportunity.
Note that once a company is under research coverage, we will change our investment rating as we see fit and deem necessary, regardless of whether or not that causes us to downgrade the covered company to Neutral, Sell, or Strong Sell.