Investment Banking Relationship - Research Proposal Example

Table of Contents. 1.1 Introduction 1.2 Research Questions and Problem Statements 1.3 Purpose and Objectives of Study 2.0 Theoretical Framework and Literature Review 3.0 Research Methods and Design 4.0 Action plan 1.0 Abstract A considerable deal of literature and a handful of researchers have carried numerous studies focusing on the financial analyst and their activities on the economy. This study is intended to analyse and evaluate the role of financial analyst in Banking. Using three sample institutions as case study, questionnaires will be administered in the form of an interview to analyst of these institutions. The job description as stated within the company’s procedure will be examined. Financial analyst brings corporate information to the market. Decisions are often being made by both the private and public investors based on the content of the financial analyst rating and reports- that is a summary of the analyst opinion of the firm’s future performance. Summary of Financial Analyst report This month Last Month Two Months ago Strong Buy 2 2 2 Buy 0 0 0 Hold 9 9 12 Sell 3 3 9 Strong Sell 4 4 2 Adapted from yahoo finance 1.1Introduction. A considerable deal of literature and a handful of researchers have carried numerous studies focusing on the financial analyst and their activities on the economy (Baker 1988, Covrig & Low 2005). Many recent financial reporting scandals (e.g. the Enron Scandal) have been attributed to poor corporate governance oversight, understatement of the role of financial analyst and poor financial reporting process (Weintrop, Li & Byard 2006). As a response to these financial reporting scandals, regulators and major stock exchanges have implemented new rules designed to improve the quality of corporate governance, strengthen the role of financial analyst (e.g., by requiring audit committees to be fully independent, role of financial analyst to include both financial and non financial information). Implicit in these regulatory changes is a belief that such measures will eventually improve the quality of information available to the users of financial reports (e.g., financial analysts) (Baker 1988, Covrig & Low 2005, Weintrop, Li & Byard). These researchers however, have focused their studies on the importance of financial analyst to the economy. Baker (1988) studies the important role of sell-side financial analysts on capital markets and by means of his analysis earnings forecasts and recommendations, financial analysts have a significant influence on the investment community (Lybaert & ORens 2007). Lybaert & ORens (2007) study how the use of non-financial information influences financial analyst forecast. The researchers came to the conclusion that financial analyst who use more forward-looking information and more internal-structure information offer more accurate forecasts for investors and the organisation in which they work for. The same idea was supported by Vanstraelen, Zarzeski, and Robb (2003) when they find out that disclosure of non-financial forward-looking information was directly related to the accuracy of the analysts' earnings forecasts. Weintrop, Li & Byard (2006) examine the association between corporate governance and the quality of information available to financial analyst. They test this assertion by studying the association between corporate governance and the quality of financial analysts’ information 1.2Problem Statement and Research questions Much prior research on financial analyst has tended to describe and focus on how investors react to financial analyst information in general (e.g. Baker 1988, Paperman, and O’Hara & Easley 1998). Today, attention is gradually being shifted to the importance of their role in the economy, their use of financial and non-financial measures (Vanstraelen, Zarzeski, and Robb 2003) Paperman, O’Hara & Easley (1998) investigate the informational role of financial analysts using a trade-based empirical technique, the researchers estimated the probability of information-based trading for a sample of New York Stock exchange stocks that differ in analyst coverage. These researchers (e.g. Paperman, O’Hara & Easley 1998) however were interested on whether financial analyst influences or create the flow of information. Their empirical findings suggested that the number of financial analysts is not a good proxy for information-based trading. To the best of my knowledge, this has been so far a study carried out similar to mine. In this study however, I consider another paradigm by focusing on the “role of financial analyst in banking”. The study is different in that, on a whole, it will be focused on financial analyst role as exhibited within the context of the banking sector. Thus the main research question on this study will be to find out: What role do financial analysts play in the banking? Other research question will be to find out if their role differ with respect to different institutions 1.3Purpose and Objective of Studies Today, the financial press, Academics, practitioners and several regulatory authorities have raised concerns that financial analyst objectivity has been compromised within the context of the banking sector (Morgenson 2002, O’Brien, McNichols & Lin 2003). For example, in a recent article titled “Requiem for an Honorable Profession” Morgenson (2002) argues that, within the Wall Street banks the research culture has shifted to a point where financial analyst have become salesmen and saleswomen within the context of their investment banking departments. Against this background, this research has as its main purpose: To investigate and evaluate the role of financial analyst in banking. This will be possible though survey to sample banking institutions within United Kingdom (UK) and structured questionnaires administered to those assuming the position of a financial analyst within these sampled institutions. Other purpose for this study will include analysing and evaluating how the activities of the financial analyst fit into the banking sector. The research area is important for the following reasons. First, the result will guide other financial institutions or corporation as a matter of segregation and separation of duties to avoid conflict of interest. Corporate managers are interested in the extent to which financial analysts actually use the non-financial information published by the companies a study of the role of financial analyst will provide substantial evidence as to what is expected of them. Thus the study will be relevant at understanding analyst potential role in corporate governance, and to informing potential reform efforts and their potential role to investors. More importantly managers want to know whether the analysts' use of reported information really influences their forecasts. By focusing on the role of financial analyst, the result of my study will proof quite useful in defining the relationship between financial analyst and other corporate managers, and hierarchies and in all in understanding the role of financial analyst in providing information to investors. 1.3.1 Limitation of studies Here, I have defined limitation in relation to the natural explanations to which I have limited the study and the active choices to limit the study area. This study is limited within context of the role of financial analyst in banking. This will be examined from a sample of UK banks and those assuming the position of financial analyst within the selected institutions. Other activities of financial analyst not mention within this area are not considered part of this study. 2.0 Theoretical Framework and Literature Review In this section of my work, I will carry out a literature review on existing research within the area of investigation (role of financial analyst,). This will be selected articles written by experts from peer review journals such as Business source premiere and Science Direct). By focusing on pear review articles more credibility will be given to my work. As this is the research proposals, all the required literature will not be reviewed here, rather a list of references will be stated for other work to be touched in the thesis proper. 2.1 Contemporary Issues Financial analysts provide analysis and guidance to businesses and individuals in making investment decisions (Paperman, O’Hara & Easley 1998). As a specialist, financial analyst gathers financial information, analyses it, and make recommendations (O’Brien, McNichols & Lin 2003). However, their job duties may differ lightly with respect to different sectors and industry. In addition, as compared to other profession their job differs because of the type of investment information they provide and their relationships with investors (http://www.bls.gov). Though substantial literatures exist in accounting and finance, much of this literature focus but financial analyst forecast (Runkle & Keane 1998). In the past attention has been paid on analyst forecast and corporate earnings. This has been due to a number of reasons; assets pricing and cost of capital models generally involve earnings expectations variables for which proxies must be provided (Runkle& Keane 1998). In the economy and particularly the financial markets, financial analyst are generally seen as those who can provide a superior proxies for market expectations (Runkle & Keane 1998, O’Brien, McNichols & Lin 2003) 2.2 Financial Analyst and Work Environment Financial analysts are generally seen as the most coveted career. According to Granville (2007) Financial analyst can work in both “junior and senior capacities within a firm and it is a niche that often leads to other career opportunities”. The financial analyst take advantage of the macro and micro business environment collect information and carry out an analysis (Granville 2007, Runkle & Keane 1998, O’Brien, and McNichols & Lin 2003). Many stakeholders within the business environment depend on this information to take action of market opportunities (Granville 2007, Runkle & Keane 1998, O’Brien, and McNichols & Lin 2003). The profession is a challenging one, as an analyst must be aware of current developments in the field in which he or she specializes as well as in preparing financial models to predict future economic conditions for any number of variables (Granville 2007). The industry and profession is quite competitive, and it can be tough to break into the analyst field, but there are some preparations you can make to position yourself for this (Granville 2007). The is no generally defined track for a financial analyst, but a good performance and study of courses in Business, Mathematics, Management, Statistics, Economics, Physics and even Engineering would proof quite useful( Granville 2007). 2.3 Financial Analyst in other Business sectors Financial analyst functions differ depending on the type of institutions they work for. Granville (2007) argued that, an individual working as a financial analyst tend to specialize based on the type of institution he/she works for. The researcher went forward to echo that today; It is most likely for financial analysts t h be hired by banks, buy- and sell-side investment firms, insurance companies and investment banks. Thus Granville (2007) identifies three major categories of financial analysts those that work for 'sell-side' investment firms, those that work for 'buy-side' investment firms and those that work for investment banks. Financial analyst in the investment banking firms differs from the other two. However, all three often play a major role in determining whether or not certain deals are feasible. The kind of analysis they make can include new investment opportunities, opportunities for takeover, venture capital funds. Financial analyst work with current financial information as well as rely heavily on modeling and forecasting to pass judgments about stocks and investment opportunities (Granville 2007, Janssen 2007). 2.4 Financial Analsyst Job A financial analyst will write reports on the companies they are supposed to cover, trying to describe the businesses and their opinion of the company's investment potential, usually from a fundamental analysis standpoint that is the analyst will carry out the future receipts and payments of a projectand pass his or her opinion (www.wikipedia.com). In a normal business analysis, finacial analyst often end up their reports with recommendations with ratings, such as "buy", "sell", "market perform", "overweight", "hold", etc. The financial analyst gather their information by studying public records, accounts of company, industry trend, general economy conditions of the country ( e.g.interest rate, political environment, government spening, inflation ) of the company and by participating in public conference calls where they can ask direct questions to the management (www.wikipedia.com). Previously, financial analysts often obtain lots of information (especially from clients of their investment bank), via exclusive meetings with upper management but today with the advent of information technology and the world wide web, things have changed.. Regulation FD (Fair Disclosure), is said to prevent most of this from happening at present. Different names are used today by different companies to refer to Financial analysts. Today it is common tohear names like securities analysts and investment analysts. Most often it is commonto see financial analyst working in banks, insurance companies, mutual and pension funds, securities firms, and other businesses, helping these companies or their clients make investment decisions (www.wikipedia.com). Those Financial analysts employed in Commercial lending or banks perform "balance sheet analysis," examining the audited financial statements and corollary data in order to assess lending risks, business potentials, areas formore investment etc. In a stock brokerage house or in an investment bank, they read company financial statements and analyze commodity prices, sales, costs, expenses, and tax rates in order to determine a company's value and project future earnings (www.wikipedia.com). In any of these various institutions, the analyst often meets with company officials to gain a better insight into a company's prospects and to determine the company's managerial effectiveness. Usually, financial analysts study an entire industry, assessing current trends in business practices, products, and industry competition (Lybaert & ORens 2007). They must keep abreast of new regulations or policies that may affect the industry, as well as monitor the economy to determine its effect on earnings(Lybaert & ORens 2007). With the use and avalability of spreadsheet and statistical software packages to analyze financial data, spot trends, and develop forecasts the job of a financial analyst has become easier (www.wikipedia.com). On the basis of the results, financial analyst write reports and make presentations, usually making recommendations to buy or sell a particular investment or security. Senior analysts may actually make the decision to buy or sell for the company or client if they are the ones responsible for managing the assets. Other analysts use the data to measure the financial risks associated with making a particular investment decision (Lybaert & ORens 2007). In investment banking departments of securities or banking firms it is quite common to see financial analyst working in teams. This team often have specific assignments such as analyzing the future prospects of companies that want to sell shares to the public for the first time. They also ensure that the forms and written materials necessary for compliance with Securities and Exchange Commission regulations are accurate and complete. They may make presentations to prospective investors about the merits of investing in the new company www.wikipedia.com). Financial analysts also work in mergers and acquisitions departments, preparing analyses on the costs and benefits of a proposed merger or takeover. There are buy-side analysts and sell-side analysts. Some financial analysts are called ratings analysts. This is so because most often, some financial analyst are often employees of ratings agencies, evaluate the ability of companies or governments that issue bonds to repay their debt (www.wikipedia.com) On the basis of their evaluation, a management team assigns a rating to a company's or government's bonds. Other financial analysts perform budget, cost, and credit analysis as part of their responsibilities. Financial Analyst Qualification Though there are formal route such as for analysts to earn a professional qualification such as Chartered Financial Analyst designation (CFA) in the United States of America, or an international qualification Certified International Investment Analyst designation (CIIA), to advance beyond a certain level within a firm. Many practicing Chartered Accountants & MBAs have also entered this domain as consultants & investment bankers respectively (www.wikipedia.com). In the United States, sell-side or Wall Street research analysts must register with FINRA, the Financial Industry Regulatory Authority. In addition to passing the General Securities Representative Exam, candidates must pass the Research Analyst Examination (series 86/series87) in order to publish research for the purpose of selling or promoting publicly traded securities (www.wikipedia.com). 3.0 Research Methods and Design 3.1Introduction In the sections that follow, I have motivated the different research methods I think will be suitable for this work. This is to give the reader certain guidelines to follow when assessing my work. By doing this, the contribution of this research to the research area will be outstanding. Thus proper evaluation of the entire work should be drawn from this section based on how I have planned, structured and conducted the work. Also I am going to give a discussion of the methods used in collecting and analysing the data, ranging from my choice of subject, perspective, preconceptions, scientific ideal, and research methods 3.2 Choice of Subject As a business student, I have long admired the position of a financial analyst their role in the economy, their professionalism and a personal service once offered to my Dad. Within the business department student are required to write a term paper and thesis as part of the requirement for the award of the degree. Having been made aware of this, I started reading existing literature, from business source premiere and Science direct, I also spend time reading previous thesis written by students in the business department. Going through existing literature I realized all what has been written on financial analyst so far has been focused on their activities, their use of financial and non financial information, forecasting errors in their job and in all the information content of their activities. To open up another paradigm, and considering the importance of a study of this nature, I decided to shift research attention into “The role of Financial Analyst in Banking”. 3.3 Perspective and Preconceptions In a study like this, it is imperatively necessary for the researcher to take a standpoint (Saunders, Lewis & Thornhill 2007, Bryan & Bell 2005). This is so because it is from the standpoint that interpretation of the subject can be made from a personal perspective. This influences concepts about the most important aspects of the research and the collection of information (Saunders, Lewis & Thornhill 2007, Bryan & Bell 2005). As a business student, my perspective reflects my interpretation of the situation at hand. To be critical, my perspective wont be different from an academician. In this study, I have used the main objective “to investigate and analyse the role of financial analyst in banking”. Since the choice of perspective naturally derives from the purpose of study, it should therefore influence the researcher’s method and theory (Bryan & Bell 2005). .Researchers should take a standpoint and interpret a particular situation from their personal perspective. This intend influences the concepts and the collection of information (Bryan & Bell 2005). As a business student my perspective wouldn’t be different from that of a businessman, but at the same time working in an academic area like this one requires the researchers to be more critical. Preconceptions are a complex pattern. Because of this situation, preconceptions make it practically impossible to be completely objective when writing a research like this one. Individual’s preconceptions are their ideas that exist regarding different phenomenon (Bryman & Bell 2005, Bechofer 2008). As a student of business and some financial background, my personal preconceptions will of course affect not only the conclusions I make, but also the whole scientific process of the study. 3.4 Scientific Ideal and Research Approach Reality can be perceived from different angles depending on the researcher and the individual. This view should follow the scientific and theoretical choices of the study. Performing a research requires the researcher to probe into different ideals. In this study, I have identified with the positivistic research approach, as it is most suitable with a qualitative research, which is the case of my study. However, some researchers can identify within two approaches. Depending on the researchers, they can identify and position themselves anywhere along the two approaches, qualitative and quantitative (Burton 2001, Bryman & Bell 2004). Since in this study I am mostly with reality. Thus I will be deductive in my approach as this will be the best method to tackle the problem at hand. 3.7 Research Method A research method involves collecting data, with specific instrument such as a self-completion questionnaire or a structured interview schedule or where a researcher listens to and watches others (Bryman & Bell 2004, Saunders, Lewis & Thornhill 2007, Burton 2001). The above example stem from two research methods. The qualitative and quantitative research methods. None of the method is better than the other, as each of the methods becomes efficient and effective once used in the proper context (Bryman & Bell 2004, Saunders, Lewis & Thornhill 2007, Burton 2001). Qualitative research would seem to have the monopoly of the ability to study meaning. It proponents essentially claim that it is only through qualitative research that the world can be studied through the eyes of the people who are studied (Bryman &Bell 2004). The weakness of this method is the effect from the control of the phenomena, which will continue to change because of the scientific process. Quantitative method on the other hand is based on already decided and well-structured questions, which all the respondents will be asked. This is also true for qualitative research method, though information is reduced to a certain area of interest and respondents are asked the same questions. This can be combined with open questions, which give the respondents the flexibility to answer from different perspectives (Bryman &Bell 2004, Saunders, Lewis & Thornhill 2007). Quantitative and qualitative aspects may also be combined in the same study. They can compliment each other by bringing width and depth into the research. Thus we believe the approach has massive potentials that best suit my needs and will help me probe into the our research question by the end of our work. Thus, in the first part of my investigation, I will study (survey) the job description of three largest banking institutions based in the UK as quoted in fortune 500 magazines. I will also survey the reports of financial analyst written within the past two years in these institutions. By doing this, I will then conduct personal interview to get their personal information, of what actually they do, and what is written on their job description as outlined in the company’s memo. This information will be presented using descriptive statistical methods, graphs and tables. Thus first section of data presentation will be to compare their role as outlined in the job description and their role gotten during the interview process. Proposal Timescale and Milestone. This proposal is develop under the assumption that the thesis will be completed within four months. In the event of adjustment, the dates should be shifted forward. Where X = ONE WEEK, XX= TWO WEEKS XXX= THREE WEEKS Activity January February March April Mile stone Finalisation of introduction, problem statement and objective of study x Chapter one completed and approved. Reading of existing literature, initial contact with sample institutions formal letter from college x xx Literature review completed Finalisation of research methods, administration of questionnaires and conducting interview x xx All questionnaires dispatched and interview administered Data collection and data entry xxx Data ready for analysis Discussion with supervisor and data analysis and presentation x Submission date agreed upon and go ahead received for presentation Report writing xx Typing of report Report submission for review x Final copy of report submitted for supervisors review Correction and presentation of final report X Well Done References: Lybaert, N., & ORens, R.(2007).Does the financial analysts' usage of non-financial information influence the analysts' forecast accuracy? Some evidence from the Belgian sell-side financial analyst. The International Journal of Accounting. Vol. 42, Issue 3, (2007) Pp.237-271 O’Brien, C. P., McNichols, F. M. & Lin, W.H., (2003) Analyst impartiality and investment banking relationship Barker, 1998 R.G. Barker, The market for information: Evidence from finance directors, analysts and fund managers, Accounting and Business Research 29 (1) (1998), pp. 3–20. Bryman, A. and Bell. E: 2004 Business research methods. Oxford University press, 2003 Burton, D. (2000): Research Training for Social Scientists, a handbook for postgraduate researchers, edited by Dawn Burton. Sage Publications Ltd, Great Britain. Hantrais L., 1996 Cross National Research in the Social sciences, London Printers, Pg.68 Vanstraelen et al., 2003 A. Vanstraelen, M.T. Zarzeski and S.W. Robb, Corporate non-financial disclosure practices and financial analyst behavior across three European countries, Journal of International Financial Management and Accounting 14 (3) (2003), pp. 249–278 Paperman, J. O’Hara, M. & Easley, D., (1998). Financial analysts and information-based trade. Journal of Financial Markets. Vol.1, Issue2, (1998) Pp. 175-201 Runkle, E. D. & Keane P. M., (1998). Are Financial Analysts' Forecasts of Corporate Profits Rational? The Journal of Political Economy > Vol. 106, No. 4 (Aug., 1998), pp. 768-805 Janssen, C., (2007).Analyst Recommendations: Do Sell Ratings Exist? http://www.investopedia.com/articles/01/013101.asp Granville, C., (2007).Becoming a Financial Analyst. http://www.investopedia.com/articles Saunders, M., Lewis, P. & Thornhill, A., (2007). Research methods for Business students, Pearson Education Harlow Read More