Downgrade Warning.


According to the report ‘J.P. Morgan Tells Analysts To Warn of a Downgrade’ analysts independence is negatively affected when it needs to clearly communicate to the company and the client banker the reason behind specific stock recommendations. Analysts are warned from conducting negative research and some firms penalize investors for recommending sale options.

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• What exactly does Peter Houghtons memo say? Does the memo say that analysts should compromise their independence? How does the memo raise questions about analysts independence? Does it make any difference whether “analysts arent pressured to change recommendations, but only to make factual changes”?

Ans) The memo of Peter Houghton does not directly point to analysts’ independence. The memo states that analysts should consult the company and the client banker before making recommendations to an investor. Also the analyst should either accept the request of the research note recommended by the firm or should clearly communicate to the firm as to why it cannot follow those recommendations. Yes, there is difference between asking analyst to change recommendations and making factual changes.

• What are the “buy side” and “sell side”? Why might the “sell side” be unwilling to make “sell” recommendations on stocks? If the “buy side” has its own analysts, would the “buy side” ever look at “sell side” analysts reports?

Ans) The ‘buy side’ and the ‘sell side’ are the two types of analysts. ‘Sell’ recommendation is considered as a part of negative research which affects the firm negatively so the sell recommendation on stocks is viewed in a negative manner. “Sell-side analysts typically work for full-service broker-dealers and make recommendations on the securities they cover. Buy-side analysts typically work for institutional money managers— that purchase securities for their own accounts” (Analyzing Analyst Recommendations para. 6).

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