Buy-side analysts tend to recommend stocks that are less volatile and more liquid than those recommended by sell-side analysts, according to a new working paper from Harvard Business School.

While considerable research during the last twenty years has focused on the performance of sell-side analysts (that is, analysts who work for brokerage firms, investment banks, and independent research firms), much less is known about buy-side analysts (analysts for institutional investors such as mutual funds, pension funds, and hedge funds).

The study finds that buy-side firm analysts recommended stocks with stock return volatility roughly half that of the average sell-side analyst, and market capitalizations almost seven times larger. These findings indicate that portfolio managers (buy-side analysts’ clients) prefer that buy-side analysts cover less volatile and more liquid stocks.

For stocks covered by both buy- and sell-side analysts, there were no differences in the buy recommendations’ performance.

The failure to find that buy-side research out-performs that of sell-side analysts raises questions about whether investment firms should continue to rely on their own research rather than using research from sell-side analysts.

Resolving whether buy-side research creates value is highly relevant to managers at buy-side firms who are faced with the challenge of allocating limited research resources.

For details see THE STOCK SELECTION AND PERFORMANCE OF BUY-SIDE ANALYSTS

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