I wrote a substack about equity research.

It’s amazing that research analysts spend their days valuing businesses, yet struggle to value their own. They give their product away for free!

Highlights in thread https://netinterest.substack.com/p/the-cautionary-tale-of-equity-research

To understand why it's free, we need to go back to the 60’s and 70’s when brokerage commissions were fixed. Brokers couldn’t compete on price, so they competed with extra content.

In the late 90's, research latched itself on to the IPO train and the economics shifted.

Jack Grubman took home $68m over the period, even if it did mean "supporting pigs".

(Unfortunately for Jack he was active in that window of time after the introduction of email but before even telecom analysts realised it leaves a permanent record.)

After Spitzer dismantled these economics, equity research became a cost centre in search of a revenue stream, wandering around like an orphan looking for a kindly parent to adopt it. Eventually it returned to its roots.

Bundling makes sense when there is a high variance in demand and zero marginal cost. Equity research, like many information goods, has both.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=11488

But if it's paid for by the fund investor rather than the fund manager, the fund manager is prone to overconsumption.

Classic principal-agent problem.

Valuing equity research means solving a principal-agent problem buried inside a bundling problem.

European regulators tried to strip it apart but this led to unintended consequences. In particular, equity research fulfils a public good—everyone with an interest in functioning markets benefits from the scrutiny scores of analysts to apply.

But who wants to pay for that?

Silver lining is the process forced the market to think about value of equity research for first time. Some studies show quality is improving and with distribution getting cheaper new research providers are emerging. https://twitter.com/Post_Market/status/1285958591980199936

Read the whole thing here. It's this week's Net Interest, a weekly newsletter on financial sector themes https://netinterest.substack.com/p/the-cautionary-tale-of-equity-research