In an effort to increase transparency in analyst research, the Israel Securities Authority soon will recommend proposals requiring research analysts to disclose information about their associations with the companies they evaluate.
"We are going to be announcing some initiatives regarding analysts and their relationship to the company they are looking at," ISA spokesman Ori Katzir told The Jerusalem Post.
The comments were in response to a Bank of Israel study released this week that concluded analysts tend to be too optimistic in their recommendations.
The study, authored by Konstantin Kosenko, looked at recommendations of 2,780 analysts between 1999 through 2004 and determined that 72 percent of them expressed "buy" or a positive analysis of the company being evaluated.
Analysts said there are a number of reasons why might give a company a positive forecast, including depending only on the company's proprietary information to make an evaluation.
"It is much more difficult to predict a profit warning and a negative execution than it is to predict a positive outcome," said Roni Biron, an analyst for Oscar Gruss & Son Inc., which specializes in Israeli technology.
An analyst might also be concerned about undermining his relationship with the company if he downgrades the stock, Biron added.
That, however, as well as worries about losing investment banking business for the firm would constitute a conflict of interest for investors.
The analyst research community in the US was rocked four years ago by a scandal in which leading analysts at top brokerage firms were found to have issued misleading recommendations, sometimes based on the companies being investment banking clients of the firms.
Gruss, Biron said, does not do investment banking.
The Bank of Israel report also concluded that analysts tend to operate in a "herd" mentality, in which some analysts are unduly influenced by and thus issue the same recommendations as reports published previous to their own.
Analyst groups can inadvertently affect the market with group price recommendations
Katzir declined to comment on the "herd" conclusions reached in the report because the ISA was still reviewing its contents.
Although Biron concedes that a group mentality does exist among analysts, he emphasized that good analysts are able to separate themselves from the pack."
"Each analyst has to develop his own skepticism regarding a company," he explained.