Monitors or Predators: The Influence of Institutional Investors on Sell-Side Analysts

Zhaoyang Gu · Zengquan Li · Yong George Yang

223 citations0/0 files storedThe Accounting Review

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Auditing, Earnings Management, Governance Financial Markets and Investment Strategies Corporate Finance and Governance

Abstract

ABSTRACT: Regulators and the investment community have been concerned that institutional investors pressure financial analysts through trading commission fees to issue optimistic opinions in support of their stock positions. We use a unique dataset that identifies mutual fund companies' allocation of trading commission fees to individual brokerages and provide direct evidence on this issue. In particular, we show that for stocks in which the fund companies have taken large positions, analysts are more optimistic in their stock recommendations when their brokerages receive trading commission fees from these fund companies. The relationship is stronger when the commission fee pressure is greater. The market reacts less favorably to the “Strong Buy” recommendations of analysts facing greater commission fee pressure. The funds also respond negatively to such recommendations in making portfolio adjustments. These results point to a source of analyst bias that has been little explored in the literature. Data Availability: The data are publically available from the sources identified in the paper.

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References

2012Nonfinancial Disclosure and Analyst Forecast Accuracy: International Evidence on Corporate Social Responsibility Disclosure 2002The rewards to meeting or beating earnings expectations 1999Conflict of Interest and the Credibility of Underwriter Analyst Recommendations 2000Corporate Disclosure Practices, Institutional Investors, and Stock Return Volatility 2002Earnings Surprises, Growth Expectations, and Stock Returns or Don't Let an Earnings Torpedo Sink Your Portfolio 2010Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research 1998Underwriting relationships, analysts' earnings forecasts and investment recommendations 2001Rationality and Analysts' Forecast Bias

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