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'Sell' recommendations rise 400%
By Lauren Foster in New York
Published: May 14 2003 23:50
The number of stock "sell" recommendations by Wall Street analysts quadrupled in the past year as banks and brokerages scrambled to revamp their research.
As of the beginning of May, "sells" constituted 10.5 per cent of total advice, compared with only 2.5 per cent a year ago, according to Thomson First Call.
"Sell" advice spiked to 10.6 per cent in January - the highest percentage on record. Before 2002, "sells" made up less than 2 per cent of recommendations. "It was not until the beginning of 2001 that we saw it slowly creep above 1 per cent," said Joe Cooper, research analyst at Thomson First Call.
The rise in "sell" recommendations follows US securities regulators' efforts to reduce conflicts of interest between banking and research. Eliot Spitzer, New York's attorney-general, led the crusade against biased stock research.
Last year the New York Stock Exchange and the National Association of Securities Dealers introduced new rules for brokerage research that were adopted by the Securities and Exchange Commission.
One of the key changes is that companies must disclose what percentage of all ratings are "buy", "hold" or "sell" and clearly define their ratings system.
The reason for the rise in "sell" recommendations, Mr Cooper said, was that following the implementation of the rules, companies realised that if they still showed a small number of "sells" they would be regarded as "shills for investment banking".
Last month, 10 of Wall Street's largest investment banks signed a settlement with regulators, drawing to an end the worst financial scandal in a generation.
The central allegation, which was neither admitted nor denied by any of the banks, was that they wrote overly optimistic reports on companies in order to win lucrative investment banking business.
Under the settlement the banks will pay $1.4bn in restitution and fund independent research for investors.
Morgan Stanley, Citigroup, Credit Suisse First Boston and Merrill Lynch were among the banks accused of conflicts of interest.
Last week, ABN Amro became the lastest investment bank to overhaul its research. Under the new system, analysts will be required to rank companies relative to their sectors; a "buy" recommendation will be a stock expected to outperform its sector by 15 per cent; and a "sell" to underperform by 15 per cent.
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