If you are an analyst employed by a firm which is stockbroker to a company and does corporate finance work for them and you feel in your heart that you want to issue a sell recommendation, it's going to be hard to do it

Estate-agent speak is familiar to most people. "Needs work" is enough to tip off the wary buyer that a house may have holes in the roof.

But members of the general public who are new to the investment market are far less tuned into "broker speak".

Many do not realise that a "hold" recommendation on a stock can actually mean "sell" in plain English - depending on who makes it. Meanwhile, anything short of a gushing "buy" may be a suggestion to rethink your strategy.

The quality, clarity and objectivity of stockbroker reports is increasingly coming under scrutiny on both sides of the Atlantic.

Attention has focused on the area following a rash of initial public offerings (IPOs) over the past two years, particularly in the high-tech sector, and the subsequent collapse of many of those firms. The IPOs were often accompanied by effusive notes from their sponsoring stockbrokers, which were left looking incompetent at best and untrustworthy at worst when the bubble later burst.

The experience has generated widespread cynicism among investors, both institutional and private, and even among some analysts. "Analysts get sick of being asked to make friendly calls because there's a block of stock to get rid of or there's IPO business to be had or other corporate business to protect," one US analyst, who is now director of an independent research group, told Reuters recently.

In a bid to counter the growing belief among investors that Wall Street research is biased, obfuscating or downright untrustworthy, the largest securities firms in the US announced guidelines last week to shore up ethical and professional standards for their analysts and other employees.

After six months of sometimes fractious negotiations, research directors at 14 Wall Street firms endorsed a set of practices for the industry covering broad areas such as analysts' compensation, personal ownership of stocks by analysts and the objectivity of reports. In Britain, a recent and rare raft of sell recommendations by Dutch-owned bank ABN AMRO has also drawn attention to the subject.

Closer to home, the Irish Stock Exchange (ISE) is keeping a close eye on the changing climate and considering the introduction of rules in certain areas.

It regularly samples broker research material to ensure that it is reasonably objective but concedes that further regulation may be needed in the area.

The main cause of concern in Dublin is the impartiality of broker reports on client companies. There is a belief in some quarters that analysts are inclined to "pull their punches" when it comes to a negative recommendation on a share so as not to jeopardise corporate relationships.

"One of the first lessons I learnt as an investor 35 years ago was that you rarely see the broker to a company recommend the sale of it shares. And if you do, you sell at once," says Mr John Lawrie, fund manager with Aberdeen Asset Management.

In addition to the prestige involved in acting as broker to a publicly quoted firm, it can lead to lucrative business providing advice on mergers and acquisitions, or carrying out placings and rights issues. The fees earned by Davy Stockbrokers and British firm UBS Warburg for jointly underwriting the recent #1 billion (£787 million) CRH rights issue would have been in the region of #25 million between them.

"If you are an analyst employed by a firm which is stockbroker to a company and does corporate finance work for them and you feel in your heart that you want to issue a sell recommendation, it's going to be hard to do it," says Ms Ann Fitzgerald of the Irish Association of Investment Managers, noting that analysts usually opt for a hold recommendation instead.

While the institutional investor usually knows the relationships involved and can read between the lines, the same cannot be said of the private investors, who have entered the market in greater numbers in recent years.

At present, stockbrokers are not required to issue a disclaimer on research material stating that they are broker to a company although some, generally those with fewer corporate clients, do. Mr Brian Healy, director of trading and regulation at the ISE, says it is an area the exchange is looking at closely with a view to making regulations.

However, even this might not be enough. One analyst points out that cross-over relationships between stockbrokers and companies can be complicated.

"A firm might not be a corporate client but you would like it to be," he notes.

The small size of the Irish market, where everyone knows everyone else, can also cause problems for analysts.

"The fact that the market is so small puts pressure on everyone. It means an analyst can't afford to be offside with companies," says one. "You don't want to have the company not talking to you, or you won't get information or be invited to presentations."

He says that sometimes, so as not to damage relationships, analysts resort to communicating negative messages about companies in forms other than print, such as over the telephone, to clients. Again, however, it's the small, private investor who is least likely to be in the loop.

Some concern has also been expressed that Irish stockbrokers, who derive the bulk of their revenues from buying and selling shares rather than from large one-off fees for IPOs, might be tempted to take an overly optimistic view of the market when dealing with an international audience.

After all, if they are not enthusiastic about it, how can they persuade overseas investors that it may be worth while to get involved.

"There may be a tendency to see things through rose-tinted spectacles," says one overseas fund manager.

Brokers, however, defend themselves against such charges.

"We have an institutional investor client base of 500 to 600 people," says Mr Robbie Kelleher, head of equity research at Davy, which has by far the largest number of corporate clients in the market at 55. "This is a sophisticated audience, capable of seeing through it if we were only providing a PR service for companies."

Mr Tommy Conway, head of equities at NCB, puts it more bluntly.

"If analysts are writing rubbish and getting their forecasts wrong, they won't get the institutional business," he says.

But stockbroking firms also concede that fund managers tend to use their research to obtain figures and financial models for the company, to offer an understanding of their strategy and sometimes to provide a second opinion. Rarely do they make an investment decision based on stockbroker advice alone.

This view is widely confirmed by fund managers.

"It's one tool among many that are useful to me. It's not as valuable as getting to know the people running a company," says Mr Lawrie.

However, private clients do not have the same access to companies and other information sources and may be more easily swayed by broker notes.

A particular area of concern, for the ISE among others, is the way broker notes can be picked up in the media and on the Internet by the wider public and read without the caution required.

jmosullivan@irish-times.ie