By Nam Hyun-woo
Analysts of domestic brokerages will be evaluated by their reports on listed companies, as they will be obliged to disclose the differences between the actual stock prices and the price targets they suggested.
According to industry sources on Monday, the Korea Financial Investment Association (KOFIA) amended its regulations last month to introduce the scheme. It recently informed member firms that the scheme will be effective beginning Sept. 1.
The move comes after the Financial Supervisory Service’s (FSS) January plan to improve the trustworthiness of analysts’ reports, which have long been the target of criticisms as they were mostly favorable to companies.
Analysts here tend to issue reports containing “buy” opinions, because an unfavorable report may be detrimental to a company’s business. Also, a sell report oftentimes deprives the analyst who wrote it of chances to access data or make inquiries of the company.
According to FnGuide, a market researcher, domestic securities firms issued 24,415 reports during the year beginning on May 28, 2016, but only 15 reports recommended that investors sell shares. Almost 80 percent of those reports contained buy opinions.
Currently, analysts’ reports are obliged to contain graphs comparing the price targets they suggest and the actual prices. But it does not show how far exactly the gap between the two prices is.
The new regulation will force analysts to calculate the gap between the two prices and display it as a percentage. By doing so, individual investors can easily find how reliable the report is and analysts would be more responsible in their reports, according to KOFIA.
“When the gap is revealed, a comparison between analysts would be possible,” a KOFIA official said. “Thus, their analysis would be more objective and their practice of issuing favorable reports only would be corrected.”
Though the new obligation is only imposed by KOFIA, it may become the law in the near future as the FSS will consider legalization of the scheme if securities firms do not comply with the regulation.
KOFIA will also guide securities firms to take the gap into account when they set their analysts’ salaries.
However, analysts are unhappy over the association’s move suggesting price target is the domain of the analyst’s discretion, while others say the new regulation would be unrealistic.
“When analysts set a price target, they draw out the price based on relevant data, such as that related to the industry’s cycle,” a Seoul-based analyst said. “Given the scheme seems to be aimed at lowering the price target, analysts would be more passive in expressing their opinions.”
Another analyst questioned the regulation’s effectiveness. “In order to narrow the gap, you can just suggest the current stock price as their price target,” she said. “That is not the point of analysts’ reports.”