CFA Certification Programs and
Sell-Side Analysts
Qiang Kang
Florida International University
Xi Li
Hong Kong University of Science and Technology
Tie Su
University of Miami
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“Lawyers have to pass the bar, doctors have medical
school and even stockbrokers need a license before
practicing their crafts. But stock analysts, who can
make or break a company’s stock with their research,
don’t need any credentials to hang their shingles on
Wall Street.”
-- Kelleher (2001)
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The CFA program
The Chartered Financial Analyst (CFA) program is an existing
voluntary certification program offered by the CFA Institute.
Candidates receive the CFA designation after successfully
completing three levels of examinations. Its popularity has
dramatically increased in the recent years. This paper
investigates the degree to which the CFA program benefits the
performance, behavior, and career outcomes of sell-side
analysts.
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CFA Quiz
As of December 2012, there are _________
CFA charterholders around the world.
How many of them are in U.S.?
How many of them are in China?
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That’s it!
103,033 as
of December
2012.
The CFA program
As of December 2012, there are 103,033 CFA charterholders
around the world. In recent years, more than 200,000 CFA
candidates from over 150 countries enrolled for the exams.
Many financial firms and investment funds require the CFA
designation as a de facto condition of employment [WarwickChing (2003)]. The popularity of CFA has dramatically
increased in the recent years and the CFA designation has
been considered as the passport to the finance industry.
http://www.newcfa.org/#/professions
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Ask me
about CFA
salaries!
The CFA program
 Three levels of CFA exams, offered annually in June (L1 is
offered twice a year, June and December).
 Six-hour exams, multiple choice questions for L1 and L2,
combination of multiple choice questions and essay questions
in L3.
 CFA Institute recommends a minimum of 250 hours for each
exam (i.e. 10-15 hours/week over 18 weeks)
 Around 1,500 “Learning Outcome Statements” (LOS) in the
self-study program.
 Registration and examination fees total to over US$2,500.
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CFA Charterholder Compensation
• U.S. reported median compensation ranging from $158K to
$456K
• Portfolio managers of equities, highest median compensation
 5-10 years, $398K
 10+ years, $500K
• Investment bankers and sell-side research analysts ranked
next
• Overall compensation highest in U.S. and U.K.
The median US
household income
in 2011 was
$51,413.
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The CFA program










Ethics & Professional Standards
Quantitative Methods
Economics
Financial Reporting Analysis
Corporate Finance
Equity Analysis
Fixed Income Investments
Derivative Instruments
Portfolio Management
Alternative Investments
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No other
certification covers
ethics.
Q: Are CFA
charterholders
more ethical?
25% of FRA!
Learn accounting
well!
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Buy-side vs. Sell-side Analysts
 Buy-side analysts working for money managers provide
research for in-house use by money managers. An analyst
employed by an entity, such as a mutual fund, that invests on
its own accounts.
Buy-side makes
more $,$$$,$$$$.
 Sell-side analysts working for brokerage firms provide
research for the firms’ clients. An analyst employed by a
brokerage firm or another firm that manages client accounts.
Unlike that of the buy-side analysts employed by mutual
funds, research produced by sell-side analysts is usually
available to the public.
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Buy-side vs. Sell-side Analysts
 A sell-side analyst's focus when analyzing possible
investments is to see whether the investment should be
recommended to the firm's clients, while a buy-side analyst
would only be interested in analyzing whether the investment
is suitable for the firm's investment strategy and portfolio.
Thus, sell-side analysts structure their research such that it is
usable for a wider audience than buy-side research. Buy-side
analysts often source research from sell-side analysts, and
then use this information as a base for buy-side analysts’ own
research.
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Prior Research
Occupational certification:
1. Rottenberg (1980)
2. Angrist and Guryan (2004)
3. Goldhaber and Brewer (2000)
4. Kleiner and Kurdrle (2000)
5. Kugler and Sauer (2005)
6. Wilensky and Rossiter (1983)
7. Wolverton and Epley (1999)
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Lawyers, doctors,
and teachers…
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Hot topic!
Prior Research
Analyst performance, behavior, and career outcome:
1. Kothari (2001)
2. Lee (2001)
3. Smith, Craig, and Solomon (2003)
4. Chevalier and Ellison (1999)
5. Piotroski and Roulstone (2004)
6. Hong and Kubik (2003)
They are most
7. Hong, Kubik, Solomon (2000)
closely related to
our paper.
8. De Franco and Zhou (2009)
9. Emery and Li (2009)
10. Jacob, Lys, and Neale (1999)
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Our Focus
What’s new in our
paper?
 Completion of the CFA designation.
 Does the program benefit analyst performance and behavior?
 Are the resources spend on the program justified?
 Is ethics training in the program effective?
 Analyst Behavior
 Performance measures: alpha and information ratio.
 Risk-taking: recommendations and forecasts
 Bias: percent sell and optimism
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Data
 Institutional Brokers Estimate System (I/B/E/S) and CRSP
 Analyst name, brokerage affiliation, earnings forecasts, stock
recommendations, affiliation changes.
 Earnings forecast database starts in 1983, and its stock
recommendation database starts in October 1993. I/B/E/S provides
standardized recommendations, with integer ratings from 1 through 5
corresponding to “strong buy,” “buy,” “hold,” “underperform,” and
“sell,” respectively.
 Analysts with only “hold” recommendations are excluded.
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Data
 CFA Institute Membership Directory
 Lexis-Nexis and ProQuest
Hard work!
 Matching I/B/E/S analyst names with the CFAI membership directory to
identify when the analyst acquires the designation.
 Determine the gender of each analyst.
 Final sample: 12,270 observations of 3,474 analysts of which 1,259
analysts, or about 36%, are CFA charterholders.
Time period:
1994-2000
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Variable Definitions










CFA: Dummy variable
ALPHA: The intercept of the Carhart (1997) model regression in basis points.
INFORATIO: t-statistic for the intercept of the Carhart (1997) model regression.
ACCURACY: Hong et al.’s (2000) measure of relative earnings forecast accuracy.
RESIRISK: Residual return standard deviation of the Carhart (1997) model regression in basis
points.
BOLDNESS: Hong et al.’s (2000) measure of boldness in earnings forecasts.
PCTSELL: Percentage of “sells” and “underperforms” among the analyst’s recommendations.
OPTIMISM: Hong and Kubik’s (2003) measure of relative earnings forecast optimism on a
one-year basis.
EXPERIENCE: Number of years that an analyst has been submitting reports to I/B/E/S.
COVERAGE: Logarithm of the average number of analysts that cover the same companies
that an analyst covers at the end of the prior calendar year.
Commonly used
variables in current
literature.
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Summary Statistics
Table 2.A. CFA and Gender Composition
Female
Male
Sum
CFA
174
(5.01%)
1,085 (31.23%)
1,259 (36.24%)
Non-CFA
389 (11.20%)
1,826 (52.56%)
2,215 (63.76%)
Sum
563
(16.21%)
2,911
(83.79%)
3,474 (100.00%)
Many
charterholders
work as analysts.
Many analysts are
charterholders.
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Summary Statistics
Don’t be fooled by this
statistic!
Table 2.B. Analyst Characteristics
Variable
Full Sample
Non-CFA
CFA
ALPHA (bps)
2.20
2.33
1.93
INFORATIO
0.17
0.17
0.16
ACCURACY
50.13
50.18
50.01
RESIRISK (bps)
12.26
13.00
10.70
BOLDNESS
50.19
50.20
50.19
PCTSELL (%)
4.18
3.91
4.75
OPTIMISM
48.01
47.95
48.16
IISTAR (%)
12.77
12.83
12.64
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Statistically
significant.
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Summary Statistics
Table 2.B. Analyst Characteristics
Variable
Full Sample
Non-CFA
CFA
WSJSTAR (%)
8.28
7.34
10.27
EXPERIENCE
1.62
1.52
1.83
COVERAGE
2.05
2.06
2.03
#REPORT
2.31
2.28
2.38
#COMPANY
2.46
2.40
2.58
BROKERSIZE
3.30
3.36
3.19
CO-SIZE ($B)
0.74
0.73
0.76
N
12,270
8,315
3,955
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Performance Improvement
DependentVariablet  a0  a1CFAt  Year Effects   t .
Dependent variables:
ALPHA
INFORATIO
What’s wrong with
this simple/naïve
model?
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Information Uncertainty
DependentVariablet  a0  a1CFAt  Year Effects   t .
Dependent Variablet  a0  a1CFAt  a2 CFAt * InformationUncertainty  a3 IISTARt  a4WSJSTARt
 a5 EXPERIENCEt  a6 COVERAGEt  a7 NREPORTt  a8 NCOMPANYt  a9 BROKERSIZEt
 a10 COMPANYSIZEt  Year Effects  Analyst Effects  Brokerage Firm Effects   t .
Dependent variables:
ALPHA
INFORATIO
This model is well
specified.
Information Uncertainty:
COMPANY SIZE
COVERAGE
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Performance Improvement
Table 3. Analyst Performance
Don’t be
a star.
Be a CFA
charterholder!
Key
result
ALPHA
INFORATIO
CFA
2.86
0.15
(z-stat)
(3.70)
(3.23)
WSJSTAR
-1.10
-0.16
(z-stat)
(-2.48)
(-3.84)
R-square
0.40
0.32
N
12,270
12,270
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Information Uncertainty: Size
Table 4.1. Analyst Performance
CFA charterholders do
even better when firms
are small!
ALPHA
INFORATIO
CFA
3.55
0.17
(z-stat)
(3.96)
(3.45)
CFA*co_size
-0.95
-0.02
(z-stat)
(-2.68)
(-1.20)
R-square
0.40
0.32
N
12,270
12,270
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Information Uncertainty: Coverage
Table 4.2. Analyst Performance
No one covers this
stock? Ask a
charterholder!
ALPHA
INFORATIO
CFA
8.50
0.41
(z-stat)
(3.15)
(3.09)
CFA*coverage
-2.75
-0.12
(z-stat)
(-2.40)
(-2.04)
R-square
0.40
0.32
N
12,270
12,270
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Performance Improvement
Table 3. Analyst Performance
Key
result
Size
Coverage
Don’t be a star. Be a CFA charterholder!
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Before and After CFA
You would think that an analyst’s performance would
improve after getting his/her charter, right?
Dependent Variablet  a0  a1YTOCFAt  a2 EXPERIENCEt  a3 NREPORTt
 a4 NCOMPANYt  a5 BROKERSIZEt  a6 COMPANYSIZEt   t .
Dependent variables:
ALPHA
INFORATIO
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Before and After CFA
Significant
improvement!
Table 4. Analyst Performance
Unsolved
Mystery
ALPHA
INFORATIO
Before CFA
2.17
0.23
(z-stat)
(2.03)
(2.12)
After CFA
1.11
0.07
(z-stat)
(1.06)
(0.88)
R-square
0.01
0.01
N
415
415
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Before and After CFA
Table 4. Analyst Performance
Unsolved
Mystery
Significant
improvement!
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Risk-Taking and Bias
Dependent Variablet  a0  a1CFAt  a2 IISTARt  a3WSJSTARt  a4 EXPERIENCEt
 a5COVERAGEt  a6 NREPORTt  a7 NCOMPANYt  a8 BROKERSIZEt
 a9 COMPANYSIZEt  Year Effects  Analyst Effects  Brokerage Firm Effects   t .
Dependent variables:
RESIRISK
PCTSELL
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Risk-Taking and Bias
Table 5
More sell
recommendations
More
reliable!
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Mobility
a0  a1CFAt 1  a2 IISTARt 1  a3WSJSTARt 1

 a ACCURACY  a INFORATIO  a EXPERIENCE 
 4
t 1
5
t 1
6
t 1 
Pr  Job Mobilityt    


a
NREPORT

a
NCOMPANY
t 1
8
t 1
 7



 a9 COMPANYSIZEt 1  Year Effects

Statistical
technology!
Ordered Probit model:
0: if 95+% to 95-%
1: if 95-% to 95-% or 95+% to 95+%
2: if no job change
3: 95-% to 95+%
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Mobility
Table 8. Mobility among Brokerage Firms
More likely
to move
up!
More
$,$$$,$$$
CFA
IIStar
WSJStar
Alpha
Accuracy
0.07
-0.06
-0.01
0.02
0.01
Experience
Coverage
#REPORT
#company
Co-Size
-0.07
-0.01
-0.15
0.12
0.01
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Mobility
Table 6
More likely
to move
up!
More
$,$$$,$$$
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Controlling for Selection Bias
The hazard ratio LAMBDA is estimated from the following
first-step regression in the Heckman’s (1979) two-step
approach to deal with the endogenous selection bias:
Selectiont  a0  a1 FEMALE  a2 IISTARt 1  a3WSJSTARt 1  a4 EXPERIENCEt 1
 a5COVERAGE  a6 NREPORTt 1  a7 NCOMPANYt 1  a8 BROKERSIZEt 1
 a9COMPANYSIZEt 1  a10 INFORATIOt 1  a11 ACCURACYt 1   t .
Robustness check
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Controlling for Selection Bias
Table 7
Parameter estimates are robust: ALPHA=2.86;
INFORATIO=0.15
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Conclusion
Using a comprehensive sample of earnings forecasts and
investment recommendations over the 1994 to 2000 period,
we find that the CFA program has a significantly positive
impact on analyst recommendation performance. The positive
impact is also economically meaningful: it is equivalent to an
annualized excess return of 7.47%, i.e., 7.47% above the riskadjusted rate of return on comparable investments. We find
that the CFA program reduces risk-taking and bias in
recommendations.
This is huge!! Consider
10% vs. 17%
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Comments and Suggestions?
 You may download this paper at
http://moya.bus.miami.edu/~tsu/.
 You may request the paper via email:
Tie Su: tie@miami.edu
Download the full
paper.
We really mean it!
The paper is
currently at the JFQA.
 We welcome your comments and suggestions!
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Thank You!
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