Publication Type
Journal Article
Version
submittedVersion
Publication Date
6-2021
Abstract
Are sell-side analysts reluctant to go against the investment views of their hedge funds when these hedge funds are their prime brokerage clients? We show that prime broker analysts tend to upgrade stocks recently bought by their clients. For stocks with upgraded recommendations, post-announcement cumulative abnormal returns are significantly lower for those purchased by the prime brokerage clients. Our results are stronger with high-dollar-turnover clients who generate more trading commissions. We also find that a hedge fund with a large bet on a stock has a stronger incentive to pressure the fund’s prime brokers to issue a favorable recommendation on the stock. Results are not driven by stocks of firms with low analyst coverage or small size.
Keywords
Hedge funds, Prime brokers, Analysts, Conflicts of interest
Discipline
Finance and Financial Management | Portfolio and Security Analysis
Research Areas
Finance
Publication
Journal of Empirical Finance
Volume
62
First Page
141
Last Page
158
ISSN
0927-5398
Identifier
10.1016/j.jempfin.2021.03.005
Publisher
Elsevier
Embargo Period
4-13-2021
Citation
CHUNG, Sung Gon; KULCHANIA, Manoj; and TEO, Melvyn.
Hedge funds and their prime broker analysts. (2021). Journal of Empirical Finance. 62, 141-158.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/6678
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jempfin.2021.03.005