From the February 2010 issue of Treasury & Risk magazine

Nasdaq Expands Paid Research Initiative

One of the thorniest challenges for midsize companies in recent years has been obtaining analyst coverage. More companies have lost the analyst coverage that helps them attract new investors as brokerage firms cut their budgets and laid off staff.

In an effort to fill that void, Nasdaq OMX is expanding an arrangement with Morningstar, the Chicago investment research firm, to allow the companies listed on the exchange to obtain analyst coverage from Morningstar.

Last June, the New York-based exchange struck an initial deal with Morningstar under which Morningstar provided basic reports on all the companies listed on Nasdaq. The companies did not pay for the reports. Now Nasdaq companies can get fuller coverage from Morningstar that includes a comprehensive initial report and at least three updates. Companies will contract with, and pay, Nasdaq for the research; one year costs $20,000, two years $36,000 and three years $48,000. Nasdaq says 11 member companies, including Famous Dave's of America and Integrated Silicon Solutions, have signed up for coverage.

Research suggests as many as 1,400 public companies have no analyst coverage at all, with small to midsize firms the hardest hit. And the global research agreement brokered by former New York State Attorney General Eliot Spitzer, under which Wall Street firms accused of biased research helped to underwrite independent research, expired last year.

"With the financial crisis, we think the problem is only going to increase," says Bruce Aust, executive vice president at Nasdaq OMX. "The research settlement has ended, so the firms that had been paying for independent research are no longer required to do so."

But do investors trust stock research that is paid for by the company? The key is the transparency of the arrangement on the part of both the company and the research firm, says Jeff Morgan, CEO and president of the National Investor Relations Institute. "As long as you're transparent, that's just one more piece of information that's out there for investors to evaluate."

Aust says the exchange selected Morningstar because "Morningstar is known for its independent research and reputation in the space. So we know the investors will know they're getting independent research." And while the exchange is contracting for the research, "Nasdaq has no say in the opinion of the analysts or the coverage," Aust says.

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