Keep Financial Analysis Independent and Objective

ISSN 1009- 5039xssc@overseaen.comOverseas English海外英语http://www.overseaen.comTel:+86- 551-6569081165690812Keep Financial Analysis Independent and Objective潘若愚(南京大学金陵学院商学院,江苏南京210089)Ahostrac: The code of ehis and sandards of prfsional conduct are imporanr and nesary for it povides sandards for pro-fsioal。dily daling, It frbids cnficts of ineret minimizing poblems; it enhances pbbie tut; and it lfts up high moral andethical standards. Maintaining independence and objectivity in daily acivitieactivities and following the code provide a fine basis of ethi-cal judgments.Key words: ethical standard; the code of ethics and standards of prprofessional conduct; independence and objectivity; financialanalysts中图分类号:F0文献标识码:A 文章编号 :1009- -5039(2013)15-0281- 041 Capital Market and Role of Financial Analystsdata, and predicting future trends of ivestmnet"They also recom.-About ten years ago, many investors lost a tremendous amountmend investment timing and buy- and-sell orders to a company orof their fortune due to the bursting of the Dot- com bubble. As Sena-to the staff of investment establishments for advising clients. Basedtor Richard Shelby stated in May 2003,“Research materials have on the type of firms that employ them and the people to whom theybecome nothing more than slling tools for investment banking...make recomendations, analysts can be compartmentalized as sell-Millions of invetors lost bllions of dllars on investments thatside analysts or buy-side analyts."were infuenced by the euphoric enironment fostered by mislead-Buy-side analysts usually work for a pension fund or mutualing advice"'" Ethical standards of investment professions and thefund company, and they are interested in analyzing whether the in-public s trust in capital markets drew publie atention.凹vestment is suitable for the firm's investment strategy. "Their re-In eapital markets, companies and governments raise funds search is usually unavailable outside of their firms. Buy- side ana-for their operations. The capital market ineludes the stock and theysts' success or talent is gauged by the number of profitable ree-bond markets, and it may be lassified as a primary market and aommendations they make to the fund. Sell- side analysts usuallysecondary market. In primary markels, new stock or bond issues work for brokerage firms that manage individual accounts. They al-are sold to investors via a mechanism known as underwriting. such so determine how promising an investmentand whether theas IPOs that are placed with investors through underwriters. PTninvestment suggestions should be reconmended to the firm's eli-secondary markets, such as the New York Stock Exchange, all sub-ents. "ell-ide analyts reconmend buying andor slling certainsequent trading takes place.H Investors purchase securities in thestocks and their recommendations are he benefits for the brokerage be-capital markets in order to earm profit on the securities.cause every time a client makes a decision to trade a stock, the bro-If you were an investor, would you have time to do all the re-kerage gets a commission on the transaction. Hence, sell-side ana-search on a security that you want to buy? Could you obtain enoughlysts structure their research such that it is usable for a wider audi-information about a security and the economie enironments? Un-ence than buy-side research. This is not to say that ell-side ana-fortunately, lack of information and transparencylysts recommend or change their opinion on a stock just to ereatecient marke. Individual investors or cormpanies that purchase equi-transactions. However, it is important to realize that these analyststy or debt securities for financial gains need financial professionalsare paid by and ultimately answer to the brokerage, not the elients.to provide them with the basic ininformation on particular securtiesEthical practices by analysts are a fundamental requirement of theand to give them the tools they need to gauge the atractiveness ofinvestment profession, and increase investor confidence in a capi-certain investments. For busy investors, this is where analyststal market.come in.2 Code of Ethics and Standards of Professional Con-Financial analysts generally work for brokers, invetmentductbanks or investment companies to assist investment decisions bygathering and analyzing company financial statements, interpreing“Applying codes to improve moral rsposibity means lfting .中国煤化工MYHCNMH G .收稿日期:2013-05-10修回日期:2013-06- -25作者简介:潘若愚,硕士,南京大学金陵学院商学院金融系教师。本栏目责任编辑:杨非菲心INNI要恿通\ 281Overseas English海外英语2013年08月responsibility from the shoulders of a single individual”. 9 If there company wants to sell and trade its stocks to outside investors, itis not a code of ethics, individuals may have different expectations faces the problem of how to sell its stock to a large number of inves-about responsibility and may make mistakes. In the U.S, the CFA tors. The company will interview several different investmentInstitute provides such kinds of code.banks, also called underwriters, and then select one to be the leadThe CFA Institute is a global, not -for- proft association of in- underwriter."4 Erik Sirri has noted that,“when firms switch under-vestment professionals that awards the CFA certification and pro- writers, the new underwriters are generally more optimistic thanmotes the highest ethical standards. Its mission is:“To lead the in-the old and move to establish substantial market- making opera-vestment profession globally by setting the highest standards of eth- tions in the firms ’equity, a research the authors atribute to theics, education, and professional excellence" .!oIts Code of Ethicscompetitive nature of the banking indutry" .!5 If an analyst worksand Standards of Professional conduct (Code and Standards) are for an investment bank that is underwriting the new issue, he or shefundamental to the values of CFA Institute and critical to retaining may be inclined to give a positive recommendation to ensure thatthe public trust in financial markets and in the investment profes-offering is successful. .sion. The ethics section is primarily concerned with complianceA similar situation occurred when AT&T isued an initial pub-and reporting rules when managing an investor's money or whenis- lic offering (IPO) in 1999. AT&T first interviewed several bankssuing research reports. Some rules pertain more generally to profes-.and then namedSalomon Smith Barney Ine. (SSB) as one of thesional behavior, others spefifically relate to the proper use of the lead underwiters for the IPO. This happened mainly because Jackdesignation for charter holders and candidates. It is very importantGrubman, a SSB analyst, gave a strong buy signal and strong sup-to understand that a firm that also does investment banking busi- port for AT&T, which was much better than the recommendationsness with a company may have an incentive to give overly optimis- from other banks."0 W hen Grubman issued his report in order to ob-tic research reports."" It is vital for financial analysts to provide in-tain a client for SSB, he violated Standard I (B), for he lost indepen-dependent and objctive research reports and recommendations. dence and his reports were not objective. SSB and Grubman alsoAs stated in Standards of Professional Conduct Section I. Profes-did not disclose their relationship with AT&T.sionalism, Part B. Independence and Objectivity:Second, family interest and gifts from customers affect inde-“Members and Candidates must use reasonable care and judg- pendence and objectivity. Sometimes the gift is tangible, but some-ment to achieve and maintain independence and objetivity in theirtime the gift is intangible. For instance, during the time that Grub-professional activities. Members and Candidates must not offer, so-man was evaluating AT&T, the co- CEO asked Grubman to up-licit, or accept any gift, benefit, compensation, or consideration that grade AT&T from Neutral (3) to Buy ()."7 In the meantime, Grub-reasonably could be expected to compromise their own or anoth-man asked Weill to gain an admission for his children to the selec-er's independence and objctivity"."tive 92nd Street Y Preschool in New York City. After Grubman up-3 Independent and Objectivegraded AT&T, his children were admitted to the preschool. AT&Tgave Grubman this huge intangible gift in exchange for its upgrade.Financial analysts are required to maintain independence andGrubman tally lost independence and objeetivity because of hisobjctivity so that their works, opinions, and judgments are not af-desire for the intangible gift.fected by any potential confict of interest. They are responsible forThird, analysts' compensations may affect independence andnot only bringing benefit to their clients but also for providing hon-objectivity, since they are associated with the profitability of the in-est research information to benefit common investors in the capitalvestment banks. Financial analysts could lean toward positive re-market. Before they issue research reports or make investment rec-ports because their works are evaluated based on the stock’s per-ommendation, they need to collect plenty of information from differ-formance that their ratings generate. For example, Grumman re-ent resources and media. Their works and suggestions must beceived the highest compensation in SSB. His total compensationtheir real opinion and free of bias. They must maintain indepen-(including deferred compensation) from 1999- 2001 exceededdence and provide valid evidence to let the public see that they are$48 million: over $22 million in 1999, over $20.4 million in 2000,independent and objective.and over $6.5 million in 2001.'High compensation directly dilut-The circumstances, however, are not that simple. It is veryed his judgment and led to his unethical behavior. At the samecommon that an individual is involved in multiple interests, one oftime, what most of the public does not know is that analysts alsowhich may possibly spoil their genuine motivation. W hen we placeown shares or are the underwriters of a recommended stock, clearlyresearch analysls in difiult positions, we may find the fllowing a conftict of ntrets. Analysts may therefore be reluctant to isefactors can influence their abilities to act independently and objec-poor reports or recommendations on a security that they own be-tively.cause it could afct their personal profit.!9First of all, relationships with investment banking are theFinally, analmemost significant factors that affect independence and objectivity,lysts need to gath中国煤化工、variety of resoure-according to Erik Sirri. Investment banks are not only financial in-es, includingMYHCN M H G work. They needstitutions that perform services but also act as an intermediary be-up- to- date information on their fi-tween the isuers of securities and the investing public. When a nancial reports, conference cll, and even strategic plans. Usual-282 /学术惠涧Z本栏目责任编辑:杨菲菲2013年08月.Overseas English海外英语ly, company managers believe their decisions are correct, their fi- closure of financial ties between investment banks with whom ana-nancial status is good, and their company stocks are undervalued. lysts are afliated and issuers of covered securities. Disclosure ofThey may try to release optimistic information to analysts. In this certain ownership positions by analysts and their firms in coveredsituation, financial analysts must distinguish between what informa-securities, as well as explanations of the terms used in rating stockstion is objective and what information is subjective. In order to and information about the percentage of rating per term. Disclosurekeep objective, financial analysts cannot just limit their resource in- of analyst' s own trading contrary to their related published reports.formation on the positive side, but must watch more carefully the Disclosure of any gift, benefit, and compensation they receivednon- disclosure information that the company wants to hide. They from correlation parties that could be expected to compromise theircan collect information from the company’s customers, suppliers,studies, etc. Disclosure of decision processors. Jill E. Fisch suggest-or even its competitors. After financial analysts have gathered the ed that,' "The second type of disclosure would provide investorsinformation, they need to view the company in different perspec- with information about rational and irrational investment decisions,tives to get a better picture. If they find some unclear information,common biases, and methods for overcoming or counteracting thosethey need to carefully investigate the suspect information and re- biases ' .1 A firm should disclosure analyst’s historical ratings andcord the nature of their research. That way, if they were asked, theysuggestions as well as related information associated with those de-are able to provide backup information to their clients. These ac- cisions. Investors can use those historical data to evaluate theirtions can encourage analysts to stay objective.jobs.4 Recommendation for ComplianceReview, test, and third- party evaluation. Rules and codesare important tools in compliance, but need to be tested and moni-.Cut off links between research and investment banking. Justtored. Firms ought to review regularly their policies and test theiras Erik Sirri has suggested,“'The firm will physically separate theirprocedures to ensure that they remain effective and are being com-research and investment banking departments to prevent the flowplied with. Firms set up third- party analysts as supervisors to re-of information between the two groups" .0 Analysts will not be eval-view how research is created and finished, whether the report is bi-uated by investment bankers, and investment bankers will have noased or not and whether there are factors affecting independencerole in determining what companies are covered by the analysts.and objectivity. Professionals cannot claim that they are not awareLet research management make overall decisions to determine theof their improper behavior in the presence of clear statements of re-content or degree to which analyst will be observed, analyzed, andstriction.reported.●Do not bring in the investment banks’revenue to financial5 Summaryanalysts ’budgets. Let the firm' s management set u a budget forIn summary, the code of ethics and standards of professionalthe research department.“Research analysts should be prohibitedconduct are important and necessary. The code of ethics providesin the effort to solicit investment banking business, including pitch-standards for professional ’s daily dealing. It forbids conficts of in-es and road shows" 2That is, during the process of ssuing stocksor bonds for a company, analysts should not be involved into this high moral and ethical standards. Maintaining independence andprocess and should not act as a sales agent for the investment bank objectivity in daily activities and following the code provide a fineduring the offering period. Set up a restrictions list on what stocks basis of ethical judgments. As Peter Norberg had stated,“Contrib-are not allowed to be traded during certain time for certain finan- ute to our understanding of how ethical codes function in practice,cial analysts. This action can enhance public trust on thoseand thereby help future attempts to improve the construction andstock’s evaluations.function of codes' .2 'W ith the development and change of the in-●Prohibit financial analysts from receiving gifts or benefitsvestment environments, the code of ethics needs to be amelioratedfrom their clients or potential clients even if the gift is not highlyby each and every professional 's contributions.valuable, since receiving any kinds of gifts can influence the publicNotes:view about the independence. As human beings, analysts can havean emotional feeling about the gift or the gift giver, which might af-[1] Shelby, Richard. "The Impact of the Global Settlement." U.SGovernment Printing Office. 07 05 2003: 1. Print.fect their judgments in some degree. Set up a restriction list on re-2] "Dot-com Bubble." Wikipedia. Web. 13 Jan 2010. tp://en.ceiving intangible gifts from related parties. Sometimes an intangi-wikipedia.org/wiki/Dot-com_ bubble>.ble gift can be more infuential than tangible gifts. It could be a per-sonal favor or a family favor. Create an effective compensation sys-[3] "Secondary Market." Investopedia . Web. 13 Jan 2010. .4] "Secondary Market." Investopedia . Web. 13 Jan 2010. .[5] "Investor WoE3 Jan 2010. .man_ aod.pdf>.[7] "What to Know About Financial Analysts." Investopedia. In-17] "In the Matter of Jack Benjamin Grubman." Office of the At-vestopedia, Web. 13 Jan 2010. http://ww.investopedia.com/torney General. Web. 22 Jan 2010. .[8] "What Is the Difference Between a Buy- side Analyst and aSell- side Analyst?." Investopedia. Investopedia, Web. 13 Jan [18] "Scurities and Exchange Commission." The US Securities2010. .sion, Web. 13 Jan 2010. htp://ww .sec.gov/litigation/itreleas-[9] M., Schwartz. "Why Ethical Codes Constitute and Unconscio-es/lr18111.htmnable Regression." Journal of Business Ethics. 19.2 (2000): [ 19] Investment Management." Wikipedia. Wikipedia, Web. 13173- 184. Print.an 2010. ttp://en.wikipediaorg/wiki/Investment. _manage-[10]"Our Mission Vision and Strategic Objectives." CFA institu-ment> .tion. CFA institution, Web. 13 Jan 2010. .flicts of Interest" Federal Reserve Bank of Atlanta Economic[1] Michaely, Roni, and Kent Womack. "Conflict of InterestReview Fourth Quarter (2004): 23- 35. Web. 22 Jan 2010. .Review of Financial Studies. 12.4 (1999): 653- -686. Print.[21] Sirri, Erik. "Investment Banks, Scope, and Unavoidable Con-[12] CFA Institute Code OF Ethics and Standards of Professionalflicts of Interest." Federal Reserve Bank of Atlanta EconomicConduct. 2009. 1. CFA Institution, 2009. 12. Print.Review Fourth Quarter (2004);: 23-35. Web. 22 Jan 2010. <[13] "Investment Banking." Wikipedia. Web. 13 Jan 2010. .//en.wikipedia.org/wiki/nvestment banking>.[22] Fisch, Jill E. "Regulatory Responses to Investor Irationality: .[14] Brigham, Eugene, and Michael Ehrhardt. Financial Manage-the Case of the Research Analyst" Lewis & Clark, Web. 13ment. 12. OH: SOUTH- WESTERN CENGAGE LEARNING,an 2010. tp://gaey.lclark.du/org/clr/objects/LCB 10_2007. 678. Print.1_ Fisch.pdf>.[15] Sirri, Erik. "Investment Banks, Scope, and Unavoidable Con-[23] Norgerg, Peter. "“I Don't Care That People Don’t LikeWhat I Do”- Business Codes Viewed as Invisible or VisibleReview Fourth Quarter (2004): 23-35. Web. 22 Jan 2010. .225. Print.[16] "In the Matter of Jack Benjamin Grubman." Office of the At-中国煤化工MYHCNMHG284 /学术惠涧Z本栏目责任编辑:杨菲菲