Why is equity research so important?
Information is the lifeblood of efficient and transparent markets. Companies who commission research from an independent firm make an important and positive statement about their business. They are demonstrating their desire to enhance their exposure to a wider investor base and boost their profile through the provision of objective and detailed disclosure.
Where companies proactively seek to raise the awareness of their business, they are the most likely to build long-term trust with their investors and benefit from enhanced liquidity and access to capital on favourable terms.
Research fills the information gap and is particularly important for smaller companies that often have fewer analysts covering their securities in comparison to their larger peers.
The availability of equity research can have a significant impact on a company’s visibility and investor’s understanding of its performance. Increased analyst coverage has been found to have a positive influence on liquidity and market capitalisation and ultimately reduce the cost of capital for companies which otherwise might achieve lower valuations.
What is fee based research?
Paid for by companies and free to investors, fee based research provides professional, financially rigorous and objective analysis and opinion on a company's performance.
Independent equity research is increasingly regarded by investors as a useful source of consolidated company information. The unbundling of research as a result of regulatory changes in the UK has prompted the growth in independent research. As institutional investors have reduced their reliance on the traditional broker research model, they have increased their use of independent research to satisfy their continued need for comprehensive analysis.
How does it work?
Research teams within independent research providers are comprised of expert analysts who have a deep understanding and experience in their specialist sectors.
Information is gathered by reviewing a company’s financial disclosures and trading history as well as those of any peers. Analysts also use industry information databases and one to one interviews with the company’s management to gain a comprehensive understanding about the business.
An in-depth initial report is written on the company following extensive analytical research. This analysis is then supplemented by updates following interim results and news alerts as appropriate.
Distribution to the correct end user is a fundamental part of effective equity research; a broad, good quality audience will ensure the research becomes a fundamental part of the company’s investor relations strategy. Research is typically disseminated via distribution networks such as Thomson Reuters, Bloomberg and Proquote. In addition many research providers manage their own proprietary databases to which private investors and high net worth individuals can subscribe to at no charge.
Today there are a wide variety of independent equity research providers that produce equity research on companies.