School ties boost analysts’ results
If you always suspected that financial markets were one giant insider network, a new National Bureau of Economic Research paper will help confirm that notion. Three researchers, from Harvard and the University of Chicago, find that analysts’ “buy” recommendations perform better when the analyst attended the same educational institution as an officer or director of the company. The outperformance is large, amounting to about 5.4 percent a year when compared with recommendations where the analyst has no school tie. The authors suggest why this might be so:
It may be that alumni networks allow analysts cheaper access to firm-level material information, which then allows them to form superior recommendations. For example, the analyst may have access to explicitly private conference calls with firm officials, or the network may simply reduce the cost to the analyst of obtaining or analyzing information about the firm (ex. the analyst can obtain information about upcoming earnings with fewer calls to the firm).
If you want your faith in markets restored, another finding in the paper helps do that. The benefit of school ties almost disappears after the adoption of the SEC’s Regulation FD (for “fair disclosure”) in 2000.
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
Isn’t this the “magic bullet” that will guarantee superior returns to all investors in corporate stock? (just like in Garrison Keilor’s Lake Woebegone, where “all of the children are above average).
All we need to do is to require that all reports by analysts include (a) the college alma mater of the analyst, and (b) the college alma maters of the major executives and directors of the corporation in question. Whenever there’s a match, a “buy” recommendation is a sure thing, right?
David’s post doesn’t indicate whether analysts’ “sell” recommendations had as much market-beating power as their “buy” recommendations. Perhaps the academicians who performed this study couldn’t find enough “sell” recommendations for their analytical results to be statistically significant. And I wonder why that might be the case!!