Sell-side quantitative equity research analysts (Quants) conduct econometric analyses of stock returns to uncover market anomalies and assist equity analysts and institutional clients with stock selection. We present novel evidence that establishes their role in helping analysts and mutual fund clients discover market anomalies and capital markets evolve toward greater pricing efficiency. Specifically, we find that analysts and mutual fund clients with greater access to Quants make recommendations and trades that reveal greater knowledge of anomalous cross-sectional return predictability. More importantly, cross-sectional return predictability is weaker in stocks that have higher coverage (ownership) by analysts (mutual fund clients) with access to Quants, and strengthens when quasi-exogenous brokerage house closures reduce the availability of Quants.

Following the Global Settlement, analysts extensively use a top pick designation allowing for greater granularity of information among buy recommended stocks, but conflicts of interest can potentially influence this designation. Examining a novel sample of top picks, we find that a calendar-time portfolio of top picks generates an abnormal performance of 17.6% per year. Top picks have greater investment value than do buy recommendations and alternative analyst investment strategies. Both institutional and retail investors trade in response to top picks. However, only institutional investors appear to identify top picks that have greater investment value when they are announced.