Abstract
This study investigates the perceived characteristics of security analysts viewed by market participants, as vital in their decision making process, which leads to final investment decisions. The decision-making process is complicated by the elements that facilitate the accuracy of said security analysts. Many factors play a vital role in the competency portrayed by security analysts and thus market participants need to be aware of and evaluate such factors when selecting the relevant evaluations (or recommendations) provided to the public. A cross-sectional survey study methodology was applied to gather the relevant data. One hundred surveys were completed by South African market participants, which were collected and upon which the findings were based. The study focuses on eight categories that could possibly lead to a change in a market participants’ perspective of security analysts, mainly: (i) regulatory environment and conflicts of interest, (ii) information exchange, (iii) inherent bias, (iv) reporting standards, (v) incentives and optimism, (vi) experience and reputation, (vii) managerial guidance, and (viii) forecast drift. The results indicated that market participants, on average, would consult at least four analyst reports prior to making a final investment decision, and a majority would monitor their investments at least bi-quarterly. Furthermore, market participants are not more likely to purchase an investment that holds a buy recommendation to that of a hold or sell recommendation. A majority of market participants believe that conflicts of interest between buy-side and sell-side analysts exist, and would thus create overly optimistic investment recommendations. In addition, market participants believe that forecast accuracy is increased with each successive follower forecast made by security analysts. Analyst compensation, experience and reputation does influence the majority of market participants when making a final investment decision. Lastly the level of corporate governance and reporting standards upon which the recommendation is based also influences their final investment decision. This study could contribute to the growing body of research on investment, security analysts and market participants within South Africa.
M.Com. (Finance)