Two Reasons for Mainstream Analysts' "Stubborn Persistence of Optimism": Saving Face and ACCESS!

Incentives drive action. And the key reason why mainstream/establishment analysts have almost always been “bullish” have been due to their personal interests. And such interests usually runs in conflict with, or at the expense of their clients/audiences.

Such is called the principal agent dilemma/agency problem. This Washington Post-Bloomberg article reinforces what I have been saying all along: (bold mine)

What can explain the stubborn persistence of optimism? Two things: saving face and access.

Analysts who’ve told their clients to buy seldom want to reverse themselves, especially when a public downgrade could affect the value of their holdings, said George Serafeim, a Harvard Business School professor.

That’s why price targets remain high even as the seven-year bull market shows signs of fatigue.

Upbeat guidance can mean golf and soirees with company executives, hosting them at investor conferences and being picked first to ask a question on quarterly conference calls.

“To have good relationship with management, the least offensive thing you can say is ‘hold,’ but really ‘hold’ means ‘sell,’” Serafeim said.

Then there’s the flip side. A neutral or negative recommendation can get an angry phone call from the C-suite, said Kennen MacKay, a biotech analyst at Credit Suisse Securities in New York.

“If you have a positive rating and wrong assumption, you might not hear about it from management,” MacKay said. “If you have an underperform, the management will attack every assumption you have....”

More...

Analysts are compromised from both sides, Gheit said. They get too close to company management and also feel pressure from their investment-bank employers who want business with the companies.

“The analysts share the blame with oil companies because they basically have this incestuous relationship,” he said. “Some of the questions on the conference calls from analysts, they are not questions, they are basically to glorify the company because everybody wants the next investment-banking deal.”...

Gearing ratings not for the benefit of investors but to attract investment-banking clients and other business violates securities law.

During the dot-com bubble of the turn of the century, equity researchers such as Merrill Lynch’s Henry Blodget were publishing “buy” calls on companies they were disparaging in private discussions. In 2003, the U.S. Securities and Exchange Commission banned Blodget from the securities industry.

In February, the SEC fined former Deutsche Bank AG analyst Charles Grom $100,000 after the agency said he publicly recommended buying shares in Big Lots Inc. while telling colleagues on the sales team otherwise. Grom neither admitted nor denied wrongdoing.

See why these analysts or "experts" will always remain blind to risks?