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A study of analysts in the financial industry finds that those with better social skills are more likely to be voted as "All-Stars".
A study on equity analysts’ social skills affect their performance and career advancements has, in fact, found significant and positive effects of social skills.
In a nutshell, it was found that analysts with better social skills produce more accurate earnings forecasts, and that their stock recommendations elicit stronger market reactions. The effect of social skills on analyst performance is more pronounced for companies with a poorer information environment.
It was also found that financial analysts with better social skills are more likely to be voted as "All-Stars". Collectively, the evidence collectively suggests that social skills are important in an analyst's overall performance and are valued by institutional investors.
This study titled 'The Effect of Social Skills on Analyst Performance', was conducted by Assistant Professor of Accounting An-Ping Lin (Singapore Management University, SMU), and is considered to be the first large-sample study to examine the effect of social skills on the performance of financial analysts.
What the study set out to identify
According to the research team, social skills comprise two elements:
(1) specific proficiencies or behaviours that play a role in establishing relationships with others, and
(2) competencies that assist individuals to interact effectively with others.
Studies have so far suggested that social skills are important in the labour market, as cited by the SMU team. For example, in the US, jobs that require high levels of social skills grew by 11.8% between 1980 and 2012.
Consistently, better social skills are associated with greater labour market returns, partly because of the inability of newer technologies to replace the jobs that require social skills. In contrast, jobs that require high levels of technical skills but low levels of social skills declined by 3.3% between 1980 and 2012, and the decline was more pronounced after 2000.
How the research was conducted
Based on the hypothesis that suggests correlations between social skills and the size of social connections, the team used the number of connections in equity analysts’ LinkedIn profiles to proxy for their social skills. More sociable analysts were, in a nutshell, were those whose LinkedIn connections were above the sample median.
The team validates this measure of social skills with several tests. In one validation test, the team examined whether more sociable analysts enjoy better management access during earnings calls and finds that these analysts are treated more favourably by managers during earnings calls. In particular, they are given higher priority to ask questions in Q&A sessions and receive longer answers from management to their questions.
In another validation test, the team found that more sociable analysts are more likely to lead an analyst team.
What the results showed
Using a sample of 38,875 analyst-company-year observations from 2014 to 2015, the team found that analysts with better social skills:
- Have higher earnings forecast accuracy,
- Issue more profitable “buy” stock recommendations, and
- Receive stronger market reactions to their “buy” and “sell” recommendations.
These findings indicate that social skills have significant effects on analyst performance, presumably because they have more information sources and are able to communicate better with and disseminate their research more effectively to investors.
Next, the team investigated the role of social skills in analysts’ career advancement. They find that analysts with better social skills are more likely to be voted as star analysts by institutional investors, likely because more sociable analysts can communicate better with institutional investor clients, be more responsive to clients’ needs, and thus provide better services to clients.
The team also finds that analysts with better social skills are more likely to be promoted to high-status brokerage firms. This finding is consistent with the labour economics literature that shows the importance of job search and hiring through social networks and that job candidates with better social skills are more likely to be treated favourably by employers.
Further analysis shows that analysts with better social skills are more likely to keep their jobs when their employers are acquired by other brokerage firms, suggesting that more sociable analysts enjoy greater job security than other analysts.
Collectively, these findings suggest that analysts with better social skills tend to perform better and have better career advancement than other analysts, supporting the importance of social skills in the labour market of financial analysts.
Because many professions require social skills and competencies in communication and because social skills can be trained and acquired from practices, the findings also highlight the importance of social skills training in the workplace.
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