The primary objective of research is to provide information to the market to make it efficient. We know that lack of information creates inefficiencies that result in stocks being misrepresented (over or under valued). Analysts try to use their expertise to analyze and value the stock, whether it’s worth investing in it or not. Research is valuable because it fills information gaps so that each individual investor does not need to analyze every stock. This division of labor makes the market more efficient.

But at the same time the role of research has not always been so "noble", because of which it is currently in such an ill-repute state? There are two reasons: firstly the current bear market gives us a new perspective to evaluate the excesses of the last bull market; secondly investors need to blame somebody. In every bull market there are excesses that become apparent only in the bear market that follows. In the rush to make money, rationality is the first casualty. Investors rush to jump on the bandwagon and the market over-allocates capital to the "hot" sector(s).

Several times research is influenced by these swings.  In bull market investment bankers, the media and investors pressure analysts to focus on the hot sectors. As a result of which they come out with research which tends to be more biased towards specific investor group. Those analysts that remain rational practitioners are ignored, and their research reports go unread.

Seeking to blame someone for investment losses is a normal event in bear markets. It happened in the 1930s and the 1970s and is occurring today. Some of the criticisms are deserved, but the need to provide information has not changed.  To discuss the Changing Face of Research, we need to differentiate between Wall Street research and other research. Wall Street research is provided by the major brokerage firms (both on and off Wall Street). Other research is produced by independent research firms and small boutique brokerage firms.

This differentiation is important. First, Wall Street research has become focused on big cap, very liquid stocks and ignores the majority (over 60% based on our research) of publicly-traded stocks. This myopic focus on a small number of stocks is the result of deregulation and industry consolidation. In order to remain profitable, Wall Street firms have focused on big-cap stocks to generate highly lucrative investment banking deals and trading profits.

Other research is filling the information gap created by Wall Street. Independent research firms and boutique brokerage firms are providing research on the stocks that have been orphaned by Wall Street. In an effort to end investors' concerns about analysts' conflict of interest, Wall Street firms, with the help of the Securities and Exchange Commission, is insisting on buying research from independent firms and to provide these reports to investors.