Analysing the Analysts: How much do social skills count for success as an equity analyst?


On the face of it, investment management is purely a numbers game. But behind the scenes, equity analysts require a lot of people skills to get an accurate stock valuation out to the fund management community.


Dr An-Ping Lin, Associate Professor at Singapore Management University, and colleagues from the US and Canada have produced the very first large-scale, statistical study on why and how much interpersonal, social skills contribute to being a successful analyst in the high stakes world of professional stock market investing.


Read the original paper:


Image Source: Adobe Stock Images / aLLister/peopleimages



Hello, and welcome to ResearchPod – thanks for joining us today.


In today’s episode, we’re looking at the work of the financial analysts who help to guide stock market investment decisions taken by the big pension funds, life assurance companies and mutual funds.


These professional investors manage vast amounts of money, and there’s a colossal range of companies they can invest in – so they look to specialist equity analysts to help guide their understanding of what these companies are worth and which one’s stocks they should buy or sell.


On the face of it, this is purely a numbers game – and equity analysts do need to process figures on company financial reports and crunch through a lot of financial ratios. But when you get inside the business, it’s clear to see that there are a lot of people skills involved in getting to an accurate stock valuation… and in getting that information out to the fund management community.


Dr An-Ping Lin, Associate Professor at Singapore Management University, and colleagues from the US and Canada have produced the very first large-scale, statistical study on why and how much interpersonal, social skills contribute to being a successful analyst in the high stakes world of professional stock market investing.


A financial markets analyst has a three-part job:

  • There’s the actual analysis and report writing; sitting in front of screens, looking at news and data, working with spreadsheets, and writing reports,
  • then there’s the digging-up of information that isn’t in the publicly available news feeds
  • and finally there’s getting the finished stock valuations and trading recommendations out to investment managers.


Company information that’s been personally unearthed can be really valuable. It can give analysts the edge when it comes to providing insights in a highly competitive market. Companies offer-up this sort of information during what are called “earnings calls”, where they address a select group of equity analysts.


So, it’s vital for analysts to work their way into that group selected for such calls, and then to get answers to pertinent questions from the company’s senior management who are on the earnings call.


This is where the social skills come in.


Being good at networking and verbal communication can also get an analyst through a company’s front door to take a good look round and ask one-to-one questions. This kind of personal access can really help to get a more accurate picture of a company’s prospects than relying on the routine public disclosures made to the media and regulators.


The Result? More accurate earnings forecasts and Buy or Sell recommendations.


Another skill that sets the best analysts apart is the ability to get their stock reports seen and acted on by investors. Sometimes fund managers work for the same firm, in which case, no problem – but mostly they’re external clients. Often, the analyst is working for a stockbroker looking for fee-earning business by providing accurate, money-making advice.


Analysts routinely send out written material in emails – but in a fast-paced environment, these are easy to miss or leave too late, so person-to-person contact can be really important for analysts to get their ideas heard.


All this means that social skills can be vital to get the best information out of a company and to the stockbroker’s clients. Forecasts are numbers and these are routinely assessed for accuracy. But employers and a stockbroker’s clients have no standard measure of social skills to be able to assess how important these might be – and to be able to identify which analysts translate interpersonal skills into superior forecasting.


That is exactly what Dr Lin from Singapore Management University and their colleagues managed to do, by taking on a massive data harvesting and statistical modelling project.


The first thing the team needed to do was to identify a group of equity analysts to study. These were sourced from the industry-standard Thomson-Reuters brokers’ report database, which holds a record of analysts and their published estimates.


To get a measure of their social skills, the study used the number of connections each analyst had on LinkedIn, the professionals’ networking website. The size of each network provided a clear, numerical indicator of an analyst’s desire and ability to forge interpersonal work-related bonds.


Around 2000 equity analysts in the database had LinkedIn profiles, and this became the study group – with each individual ranked according to the size of their social network.


The study then brought in a lot of other data to make sure that they only ended up measuring an analyst’s success in light of work-related social skills.


Employment conditions needed to be taken into account, and that meant factoring-in things like the amount of supporting resources available in each brokerage, the number of industries and companies that each analyst had to follow, the number of reports each analyst had to produce … all things that could make a difference to job performance.


The study also had to consider differences in the amount and quality of information disclosed by different companies, as this can affect the ability of analysts to make a successful forecast. The study assessed how easy each company made their analyst’s job by grading company filings and management guidance data in the Thomson-Reuters records.


With all the analysts ranked by social skill level, and with other factors that might contribute to their success or challenges taken into account, the team could now examine all the evidence for a link between social skills, forecasting accuracy and investor engagement – all the key metrics of a successful equity analyst.


By comparing each analyst’s earnings forecasts in the Thomson-Reuters database against actual earnings-per-share data, and by comparing each buy and sell recommendation against actual stock value changes, the study found that analysts highly ranked for social skills do indeed make more accurate earnings forecasts and buy-sell recommendations than analysts with weaker social skills.


The study revealed a lot of other clues that pointed to the connection between social skills and career success.


LinkedIn profiles showed that analysts with wider networks tended to have MBAs, which is significant as MBA programs spend a lot of time on interpersonal skills. Analysts with strong social skills were also more likely to be leading a team, another indication of success.


The study also investigated the recruitment priorities of Wall Street brokerages by scouring job adverts from Burning Glass and found that brokerages did tend to look for highly sociable stock analysts. Higher social skills also went with having more Wall Street experience – showing that staying the course was strongly related to having good interpersonal skills.


The study also looked for evidence of a link between good social skills and good relations with the companies that the analyst reported on.


Sources for this aspect of their investigation were the records of earnings calls that companies made with named analysts using a transcript database held by Thomson Street Events. These transcripts allowed the study to examine the number of questions individual analysts asked and the length of the replies they received.


Comparing this with their social skill rankings, the team found that analysts with the best social skills were on more company calls and got more detailed responses from management than less socially skilled analysts. So the more socially skilled were better at extracting information, which could then contribute to their better forecasts.


The study also documented strong evidence of the importance of other social ties – Old School Ties. Earnings forecasts were more accurate when an analyst had been to the same school as an executive in the company that was being reported on. More evidence of social advantage.


The team wanted to make sure they were comparing like with like by looking into those stock recommendations that were made after a significant public news story like a company earnings announcement, as obviously a forecast or buy-sell recommendation made after a price-moving news story is easy to make and requires no particular skill on the analyst’s part.


The team found no evidence that analysts with better social skills and forecasts had produced any more or less of these easy calls.


The study then looked at the quality of communication between analysts and their clients in the investment management industry.


Clues to communication quality could be found in Institutional Investor magazine, a highly regarded industry publication that conducts routine polls of fund managers, asking them to rate analysts. This All-Star ranking clearly tallied with the study’s ranking of analysts by social skill level. Analysts with the best social skills were more likely to be voted an All-Star. This was a good indicator another crucial factor in job success, the ability of an analyst to reach the investor base and have buy/sell recommendations acted upon.


As a final check on their own results, the research team carefully looked into the possibility that they’d used a biased sample by only working on analysts with Linkedin profiles. What if the most able and experienced felt no need to join LinkedIn?


So they went back to their starting point, the pool of analysts with forecasts listed on IBES … and now selected the ones that didn’t have a LinkedIn account. This study found that this group actually performed worse than the LinkedIn group and received relatively fewer All-Star Analyst awards.


All in all, the study has produced a comprehensive verdict – that social skills boost stock analysts’ forecasting performance and that’s because the interpersonal skills get greater access to insightful company information.  They also help make the analyst more popular with investment managers, which gets forecasts noticed, making for a more successful career and a better business for the brokerage, which goes to show that firms who hire with social skills firmly in mind are doing the right thing. This is one skill set that can’t be computerised . At least, not yet.


That’s all we have time for in today’s episode – Be sure to stay subscribed to ResearchPod for more of the latest science, and find the teams original research linked in the show notes for this episode. Until next time, see you again soon.


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