Working Paper: CEPR ID: DP5001
Authors: Alexander P. Ljungqvist; Felicia Marston; Laura T. Starks; Kelsey D. Wei; Hong Yan
Abstract: Because sell-side analysts are dependent on institutional investors for performance ratings and trading commissions, we argue that analysts are less likely to succumb to investment banking or brokerage pressure in stocks highly visible to institutional investors. Examining a comprehensive sample of analyst recommendations over the 1994-2000 period, we find that analysts? recommendations relative to consensus are positively associated with investment banking relationships and brokerage pressure, but negatively associated with the presence of institutional investor owners. The presence of institutional investors is also associated with more accurate earnings forecasts and more timely re-ratings following severe share price falls.
Keywords: analyst forecast accuracy; analyst recommendations; banking relationships; conflicts of interest; institutional investors; investment banking
JEL Codes: G20; G21; G23; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional ownership (G32) | Analyst behavior (G41) |
| Institutional ownership (G32) | Cautious recommendations (D18) |
| Larger blocks of shares (G34) | Cautious recommendations (D18) |
| Reputational capital (E22) | Less aggressive recommendations (Y50) |
| Institutional ownership (G32) | Greater accuracy in forecasts (C53) |
| Higher institutional ownership (G32) | Quicker reaction to negative information (D91) |
| Institutional investors (G23) | Moderating influence on conflicts of interest (G38) |