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Australian Stock Exchange Limited (ASX) and Finsia - the Financial Services Institute of Australasia - have signed a Heads of Agreement to commence a two-year pilot scheme to increase research coverage of medium-sized ASX-listed companies.
From early 2007 investors will have access to equity research for a larger range of companies than is currently covered by analysts.
The ‘Equity Research Scheme’ will be available to companies with a market capitalisation between $70 million and $700 million as at 30 June 2006 – a sector that attracts limited equity research.
If the trial is successful, ASX and Finsia may examine options to extend the Scheme to listed companies with a capitalisation below $70 million.
The Scheme will be offered on a fee-for-service basis. The fees will be used to cover the administration costs of the Scheme and any additional costs incurred by research providers.
The independent and broker research providers that have so far agreed to participate in the two-year trial of the Scheme include:- ABN AMRO;
- Aspect Huntley Morningstar;
- Wilson HTM;
- Macquarie Bank;
- Property Investment Research; and
- E.L.&C. Baillieu.
Finsia, the largest financial services professional body and educator in Australia and New Zealand, will administer the Scheme, allocate companies to research providers and be a key distribution platform for the research reports.
Research reports will receive broad distribution by a combination of Finsia’s website (www.finsia.edu.au) and the dissemination channels of the research providers. Linkages will be provided from ASX’s website to Finsia’s website.
Importance of equity research for market activity
Studies in markets around the world have demonstrated that equity research can have a positive impact on liquidity, a key measure of stock market activity. Quality equity research can also have a beneficial effect on investor confidence, an important ingredient in a company’s ability to raise capital in a cost-effective way.
In Australia, the availability of equity research falls away significantly outside the top-200 stocks. Nearly all companies (96%) in the top-200 receive equity research coverage. Over 50% of the next largest 400 companies, the Scheme’s target, receive no coverage at all.
There are a number of reasons for this, including scale issues, the increasing cost of producing research and the wide selection of company listings needing to be covered by a limited number of research providers and analysts.
Peter Hiom, ASX Group Executive - Business Development, said: “The extension of research coverage to a larger suite of listed companies is an important initiative for ASX. We believe it will benefit the market in three ways. It will assist investors to make more informed decisions for stocks that currently receive little or no coverage; it will assist companies to attract investment by increasing investor awareness; and finally for the ASX and the market as a whole, it will create a more liquid and therefore more attractive market.”
Brian Salter, Finsia CEO, said: “By connecting equity analysts and underexposed companies, we are providing the tools for both sophisticated and ‘mum and dad’ investors to broaden their portfolios. There will always be plenty of ‘diamonds’ among the near-2,000 companies listed on the ASX and access to quality independent research will assist in their discovery, as well as improving the overall efficiency of the market.”
