Why Most Listed Companies Are Unlikely To Get Bank Research Coverage

By June 12, 2018 December 10th, 2018 Corporates, General

 

Why Most Listed Companies Are Unlikely To Get Bank Research Coverage

Written by Anisha Kundu
C-Suite Lead, Smartkarma


This graph highlights 93% of the companies listed on Singapore Stock Exchange (SGX), mapped out based on market cap and analyst coverage.

What stands out?

The larger a company’s market capitalisation, the greater the analyst coverage.

Why does this statement hold true broadly?

Historically, only sell-side analysts covered listed companies. Independent and boutique investment research houses only cropped up around 20 years ago (around the time scandals such as Enron came to light) to offer unbiased opinions about companies and their underlying value.  

What is the motivation for sell-side analysts to cover companies in the first place?

As the name suggests they “sell”, but do not sell research per se. Bank analysts provide research:

  1. To the buy-side/investors for no fee –  hoping that the research would lead to (buy/sell) trades through the bank’s brokerage, which would eventually earn commission dollar for the trade
  2. On companies – hoping that when these companies sought to raise capital, the covered companies would come to their investment banking division to run the deal, which would earn book-running fees

Why does market capitalisation matter to sell-side analysts?

Companies with larger market capitalisation:

  1. Are more liquid and therefore can be traded more often, potentially offering more commissions to the bank
  2. Run a higher probability of raising capital and hiring an investment bank to do the deal

What does this mean?

Mid and small market capitalisation companies were typically excluded from sell-side coverage by nature of design.

How does this apply to listed companies on the SGX…

We looked at 654 companies on the SGX (~92% of the total) for which we have data (sourced from Capital IQ). We categorised companies as follows:

Market Cap
> USD 5 bn
USD 1 bn – 5 bn
< USD 1 bn
Analyst Coverage
Large Cap
Mid Cap
Small Cap
Total
Less than 5
0
2
507
509
5 – 9
2
17
64
83
10 – 19
6
23
4
33
More than 19
16
13
0
29
Total
24
55
575
654

Yes, a clear majority of the companies on the SGX are small and mid cap, but even more so north of 70% of the companies have fewer than 5 analysts covering them. Additionally, 26 companies (all small cap) do not have even one analyst covering them.

A couple of interesting outliers:

  • 36 mid cap companies out of the 55 have more than 10 analysts covering them.
  • 68 small cap companies out of 575 have 5 or more analysts covering them

What’s so important about analyst coverage?

Analyst (sell-side or independent) coverage is meant to provide investors (the buy-side) with “unbiased” research on an entity that they might be interested to invest in. Many a time an investor in ready to invest in a listed company, but also wants some external research other than what the company tells them to further validate.

Given the existing reasons on why companies are covered by sell-side analysts, it could lead to selection biases where large market capitalisation companies continue to gain investor interest and the small and mid-cap companies are neglected. 

In summary, research coverage of a company should not be determined by its market capitalisation, but by the value that can be attained by and created for the investment community.


Why Most Listed Companies Are Unlikely To Get Bank Research Coverage

Written by Anisha Kundu
C-Suite Lead, Smartkarma

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