Stock Analyst Controversy Forces Business Journalists to Do Better Job

Business journalists have long relied on stock analysts to explain developments in industry. After all, the job of analysts is similar to that of a reporter � they follow market trends, examine financial reports, talk to management and draw conclusions on whether a stock is worth owning.

And like reporters, analysts are supposed to be objective. For a long time, equity research was kept separate from investment banking based on those ethical grounds. But as we recently learned, analysts were increasingly expected to keep investing banking clients happy. Often, the compensation of analysts became linked to the performance of the stocks they covered. Buy recommendations grew disproportionately.

After the market bubble burst and government investigations exposed troubling conflicts of interest in Wall Street research, the credibility of analysts suffered a huge blow. But two years after the SEC approved new rules to address the problems, the easy rapport reporters and analysts once enjoyed has faded away � and many think that's a good thing.

Analysts are now required, among other things, to provide greater disclosure regarding stock recommendations when talking to reporters. At most firms, analysts must route all media calls through its public relations or compliance department to ensure the necessary disclosures are made. Some firms have decided to prohibit their analysts from speaking to the media altogether.

For reporters on deadline, the rigmarole of getting permission to talk to an analyst often isn't worth the hassle.

"The new rules are an obstacle to getting the interviews I use to be able to get," said Kathleen Pender, a financial columnist at The San Francisco Chronicle. "Most analysts are still willing to talk, but by the time they get clearance, it's often too late."

Even if reporters can get access to them, analysts have been reined in by the rules, said Adam Feuerstein, a reporter at TheStreet.com. "Some analysts are more skittish about what they say these days. They're sticking much more closely to what they write and publish," he explained. "We're probably getting less candor and less information from analysts than we once did � but that's not necessarily a negative, given some of the things that they used to say."

In the wake of the scandals surrounding analysts who touted stocks undeservedly, news organizations stepped up publishing the disclosure of potential conflicts of interest when analysts were quoted � a practice done rarely in the past.

Since its founding, TheStreet.com has always disclosed investment-banking relationships with companies when analysts were quoted � something Feuerstein believes every reader should know. "But now that publishing disclosure has become ubiquitous, the danger is no one will pay attention to it anymore," he said.

Whether readers heed it or not, the government came close to mandating that print media publish potential conflicts of interest whenever sources were quoted � a rule that does apply to broadcasting.

Regulations passed by the Securities and Exchange Commission in 2002 require analysts making public appearances on television or radio to disclose on air whether they or their firms have any stock positions in or have done business with the companies they are discussing.

The proposal to extend the rule to print media caused an uproar. Publications argued that the rule forced them to ignore their own editorial judgment. The proposal was withdrawn in 2003.

However, the rule still requires full disclosure by analysts of potential conflicts of interest when they are interviewed by print journalists. The decision to publish that information is left up to the news organization.

Considering the difficulties, many business journalists are simply turning to other sources � independent research providers, mutual fund managers and newsletter editors � not to mention digging into financial reports themselves.

"I don't call sell-side analysts as much as I used to, partly because it's more cumbersome and partly because of all the conflicts that exist," Pender said.

Of course, bias exists in buy-side research as well, but potential conflicts are more clear-cut and simple � they either own the stock or they don't.

"There are so many other sources you can use and reporters should challenge themselves to seek them out," Feuerstein said. "Calling up the sell-side guys is the easy route."

Direct sources include SEC filings, annual reports and company statements. Then there are competitors, suppliers, customers, current and past officers, and employees to interview.

Now that questions and inconvenience swirl around interviewing analysts, journalists are pressured to do a better job, contends Michael Hiltzik, a business reporter at The Los Angeles Times.

"Analysts have traditionally been overused by all of us in the business. They're quote machines to articulate the conclusions of the writer," Hiltzik said. "I'm not entirely convinced that it's a big loss if access to them is somewhat more difficult or restricted."

The wider the net reporters cast for sources � asking hard questions instead of accepting judgments uncritically � the better off readers are.

"Business reporters should wean themselves from security analysts and learn how to analyze financial statements," Hiltzik advised. "If we're forced to undertake that education because of all this, it's worth it."

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism