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Sell-side ResearchSponsored ResearchBenefits of A-List
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Dependence-free Research

Failings of sponsored or corporate research

In response to research gaps left by the sell-side, under-researched companies have been turning to a relatively new tier of ‘sponsored’ or ‘corporate’ research providers who will provide research coverage in return for a fee. Although these research firms may be independent of the sell-side, their research is certainly not free of commercial and operational conflicts which, yet again, can disadvantage the investor.

Foremost of these conflicts is that the subject company is paying to be researched. The motive may be to raise the company’s profile in the investment community, increase trading liquidity in its shares and achieve a higher market valuation – no different perhaps from what can be achieved by sell-side research, were it available.

But when the subject company is paying, it is hardly going to tolerate a report that paints it in an unfavourable light. And equally, because the research provider makes more money the more companies it researches, it is not going to be picky about the quality of the companies that it researches. Although much may be made of the sponsored research house’s ‘objective’ stance, there is no hiding from the payment conflict that sponsored research poses to investors.

Access to the distribution capability of sponsored research providers - via platforms such as Bloomberg – is an added attraction for companies seeking research coverage. For the investor, though, it brings another conflict to the table. Because the research is available free of charge to everyone, it provides its readers with no information advantage over other investors.

Companies are typically charged a fixed annual fee for sponsored research, to include an initial report and then a pre-agreed number of ‘maintenance’ commentaries. It is unfortunate that where the volume and price of the research product are fixed in advance in this way, there may remain no commercial incentive to expand quality above a threshold level.

Readers who pay nothing can demand nothing in terms of the quality of the research or of the companies that are being reported on. Even the ties that bind the traditional sell-side broker/client relationship - based on the mutual benefits of commission income in return for short-term share price performance or deal access – are absent from sponsored research.