LinkedIn sell-side analysts less accurate than peers

Sell-side analysts who promote their stock calls with puffy LinkedIn posts have weaker than average forecasting abilities, according to research which considered hundreds of profiles on the professional social networking site.

Despite the patchy ability to accurately predict how a company will travel, these equities analysts rise faster through the ranks, two economics and management academics at Beijing’s Tsinghua University found.

Sell-side analysts at major banks are important providers of information to clients. Some, mainly at smaller firms, are very active on LinkedIn. Dominic Lorrimer

“We identify a robust negative correlation between the expressive tone conveyed in their self-presentations and forecast accuracy, particularly among male analysts, less experienced professionals, and those with fewer LinkedIn followers,” they wrote in a working paper titled Empty vessels make the most noise: analyst self-promotion behaviour and market outcomes.

The researchers studied the personalised self-descriptions of 20 words or more on LinkedIn written by 727 sell-side analysts, using Python-based language processing kit TextBlob to measure the emotional tone. Just over half of those analysts were measured as “exhibiting self-promotion behaviour”.

They then took annual earnings forecasts for 3336 companies listed in the United States between 2021 and 2023, and found analysts that struck a more positive tone demonstrated less ability to correctly predict performance.

Their conclusion? The self-promotion was “strategic … behaviour aimed at compensating for skill gaps and increasing visibility. Both investors and employers value such expressive tone”, according to the paper.

Investors are more willing to follow positive investment commentary than negative commentary, it said.

“Analysts’ optimistic self-presentation not only correlates with weak performance” but also “contributes to market mispricing, resembling the Mad Money effect,” it said, adding that “investors, like employers, weren’t always rational”.

According to the research, the average analyst maintains 1370 LinkedIn followers and 470 direct connections, while possessing approximately 15 years of general work experience. Annually, each analyst generates an average of 106 earnings forecasts spanning 23 different companies.

It all raises questions about the role that sell-side analysts provide to clients, particularly in an environment where global financial firms are increasingly promoting their brands through social media.

Forecasting is just one component of a role that also requires an ability to talk and market to institutional and retail clients, research different industries, and increasingly, use artificial intelligence for more thoughtful outcomes.

So, do the working paper’s findings hold true in Australia? Policies about publishing views, stock calls or research on social media platforms differs from firm to firm.

At Barrenjoey Capital Partners, for instance, analysts must get approval before sharing their views on social media.

Simon Scott, head of markets at MA Moelis Australia, said his firm preferred analysts to focus on talking about their research with clients.

“Once we publish and disseminate stock specific research, our focus is on marketing to our institutional clients rather than promoting it on social media to generate clicks,” Scott said.

“However, industry pieces usually have a broader audience across both social and mainstream media, where we engage if we believe the thematics will resonate.”

Scott said the firm didn’t tend to rely on social media to source talent. “The best identifier of talent remains referrals from clients, corporates and colleagues, albeit we do engage headhunters to use their networks to source interesting candidates, particularly from outside the broking community.”

A spokesperson for Morningstar said the firm recognised LinkedIn users are “increasingly turning to individuals rather than institutions for market analysis and investment guidance”.

“By supporting our analysts as trusted voices on the platform, we’re able to highlight Morningstar’s insights in a more personal, accessible format that resonates with investors,” she said.