Publication Type

Journal Article

Version

submittedVersion

Publication Date

10-2006

Abstract

Prior studies document that institutional investors outperform the mar- ket. We investigate whether this superior performance is partly derived from institutional investors use of sell-side analysts stock recommenda- tions. First, we find that the quarterly change in institutional ownership is positively correlated with consensus recommendations. After control- ling for other determinants of institutional holdings, the quarterly change in institutional ownership is on average 0.90 percent higher for firms with favorable recommendations than for those with unfavorable recommendations. Second, using large trades to proxy for institutional trading, we find that there are more buyer-initiated than seller-initiated large trades around favorable recommendations and vice versa for unfavorable recommendations. Lastly, we find that the change in institu- tional ownership that is explained by stock recommendations is associ- ated with positive abnormal returns in the future, about 4.2 percent per year. Overall, these results indicate that institutional investors trade upon stock recommendations and that such trading contributes to their superior performance.

Keywords

Financial analysts, institutional trading, stock recommendations

Discipline

Accounting | Corporate Finance

Research Areas

Financial Performance Analysis

Publication

Journal of Accounting, Auditing and Finance

Volume

21

Issue

4

First Page

399

Last Page

440

ISSN

0148-558X

Identifier

10.1177/0148558X0602100405

Publisher

SAGE

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1177/0148558X0602100405

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