Exchanges can help their listed companies and investors by filling the gap in independent research.

Following the dot-com crash and the collapse of Enron and WorldCom, new regulations were put in place in the U.S. to improve transparency. More than a dozen investment banks agreed to settle charges that they influenced equity research analysts at affiliated brokerage firms. The banks also agreed to provide free independent research to their brokerage clients for five years. That term has now ended, and there is an opportunity for the private sector – including exchanges – to fill the gap in independent research.  

The brain drain from Wall Street’s research departments has meant that analysts have stopped covering many companies, especially smaller ones. Currently about 1,400 companies listed on U.S. exchanges – almost one quarter of the total number listed on NASDAQ or NYSE Euronext – do not have research coverage, and data suggests that this number is rising. The lack of research coverage can potentially decrease the liquidity of listed companies’ shares and raise their cost of capital, albeit indirectly. Investors may lose out simply because they are unaware of possible opportunities.  

Exchanges already offer an array of services to support publicly-listed companies, but they can go one step further by partnering with independent resources to provide basic research on listed companies. Morningstar, for instance, recently started providing an up-to-date profile on the 900 NASDAQ OMX-listed companies not being covered by research analysts. Investors can gain an understanding of the industries the companies operate in and access important financial information such as cash flows, balance sheets and income statements.

Additionally, the reports give an overview of company managers and board members as well as how much of the company each owns. Morningstar is planning to add an Industry Aggregate data page so investors can look at each company in the context of industry averages.

The reports are updated daily and distributed free through Morningstar and NASDAQ OMX. No fee is charged to listed companies.

“It makes sense for research providers and stock exchanges to work together to provide this type of information,” says Tricia Rothschild, Vice President, Equity Research at Morningstar. “It serves both parties’ goals, and it ultimately serves investors too. I think other exchanges would be interested in taking a look at the needs of their issuers and putting together similar arrangements.”

To find out price targets and earnings estimates before entering into transactions, investors either have to do the additional legwork themselves or pay for a more in-depth report. But the basic report enables investors to learn about these companies and industries and make better-informed buy and sell decisions. Companies benefit because a credible third party is disseminating information about them. And finally, increased transparency and liquidity, and potentially higher volumes, strengthen the market as a whole.  

“Admittedly, this initiative doesn’t fully solve the research problem,” says Bruce Aust, Executive Vice President at NASDAQ OMX. “But clearly this innovative new service is a step in the right the direction.”

by Sherree DeCovny
photo istockphoto