What purpose does it serve? Who are the primary customers? How does it directly or indirectly generate revenue?
I know this is a dumb question, so feel free to skewer me.
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Gives investors access to senior management and market analysis. The way a investment bank will support a company after an equity or debt deal is through market making (sales & trading) and wall street coverage (research).
BTW horrible question so let me now skewer you ... feel free to use the search bar or common sense next time you want to ask me a question.
The research department where I am does a ton of work supporting analysts in various ways. "Hey can I get a list of Aa1 credits in so and so sector?" Or pulling down and sending you the S&P/Moody's/Fitch reports you need from various issuers. They keep the indices files up to date with current rates. Etc.
And if you meant equities research then yeah that's a really stupid question.
It's not a dumb question, M&A/IBD guys ask this question every day
Well then they too are dumb. Yes it is a dumb question but I won't skewer you because at least you acknowlege it. Now, go try reading a basic description of ER and see if you can't at least partially figure it out.
Research generates commissions for the sales/traders.
Follow up question from the original poster:
Who is the primary end consumer of these reports? Retail investors, institutional investors, or investment bankers?
Institutional Investors. It is not generally available to retail investors (I say generally because it's not thaaat hard to get your hands on some research). The buyside uses the research (in reality it is more about management access, at least at my shop, which you could argue is an interplay between the relationships of the entire IBD) and repays the bank in trading commissions. So, while ER cannot directly claim much revenue, they certainly help drive trading revenue.
Also when I was in IB we had weekly over-the-wall meetings with research to talk about general industry trends and stuff. There is some synergy there.
Wasn't there a firewall at your bank preventing that Thunder?
There was a chinese wall as in any bank, but compliance allowed us to have these update meetings as long as they could listen and record them.
Read this: http://www.investopedia.com/terms/b/broughtoverthewall.asp
If you're a small company looking to do an IPO, companies will offer research coverage as a quid pro quo on underwriting contracts. Those relationships can also lead to other deals later on.
Smaller banks tend to cover smaller companies with not as much coverage and so the buy-side will reach out to them for ideas. Being the 1,000th shop to cover MSFT doesn't add much, but covering a small cap with only 3 other shops adds real value.
This is almost entirely correct (and one of the few thoughtful posts in this mindless thread). However, it's important to note that all IPO bookrunners have a policy to initiate research on the company they take public. One of the key reasons why some banks end up winning a bookrunner role on a IPO bakeoff is because they have a star equity research analyst.
Isn't it also supposed to support comparables analysis during M&A, with future performances and multiples for comparables?
^^Anyone with access to a computer could give you comparables. You don't need a million dollar Analyst to give you that.
There's a lot of fluff reasons as you've clearly seen in this thread, but in reality I think sell-side research within an investment bank is not nearly as valuable as it may have been in the past due to new regulations.
Research used to be helpful in gaining IBD business because bankers could imply that a company would be given favorable reviews by the bank's covering analyst if said company did business with them. That model is not allowed anymore due to the Chinese Wall.
Now the theory is that research helps gain trading business, but I don't buy that either because funds will primarily execute trades with sell-side traders they are friendly with and/or who provide the cheapest fees.
Research is in a strange position where it does not provide any direct revenue, making it difficult to push for higher compensation, which is the main reason I left the industry.
^^^ Bowser. I disagree with this. I work in research so I can break it down in a little more detail. Research is essential to a trading franchise. You are correct, majority of the trades from the buy side are executed on a relationship basis. If you want to trade PG, and you know a trader at a bank who covers PG and have a good relationship with him, you will trade with him. But this is where research comes in. A good research department gives the traders/sales people an opportunity to build that relationship. You can't be a trader and expect to have a relationship with a PG analyst at a buy side fund without ever talking PG with him. Your relationship with him builds because you are able to articulate good thoughts about PG, and then the other factors play into the relationship. If you have no research franchise, your traders have no relationship with these fund managers, and you are not getting any trades because the guy at the other bank has a good research franchise behind him and can talk about the company with the trader on the buy side.
It is also true that buysiders don't depend on our research to generate investment ideas. But they do use our research to initiate a dialogue and discuss their thesis with the traders and research analysts. The research doesn't go unread by the buyside it is used, just not as the only weapon in making a decision. Also, without research, very few buysiders have access to corporate management, which is another reason why a good research franchise makes it easier for traders to establish those relationships. When you are a consumer trader and you can go to a consumer trader on the buy side and be like yeah hey my analyst is hosting a meeting with the CEO at xyz company and we have a few spots open, would you like to come? That helps your trading revenues...a lot.
Although it is less valuable post-Spitzer, I still remember a study (post Global) that demonstrated that covering a company increased the chance of winning IBD business from it.
Also, everything IamObama said is dead on. It helps S&T a lot. Commissions are generally split 33/33/33 for a reason.
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