Sell‐side analyst recommendation revisions and hedge fund trading before and after regulation fair disclosure

Self Cite

We find strong disagreements between hedge funds and other institutions in their common stock trades are twice as likely as agreements. Overall success of hedge funds’ trades and poor performance of non‐hedge funds’ trades are both confined to disagreement stocks. Although hedge funds are commonly positive feedback traders, they are neither positive nor negative feedback traders for stocks heavily sold by other institutions. Hedge funds also depend less on earnings news. Our findings highlight the importance of disagreement in studying the performance of institutional investors’ trades and are consistent with the notion that skilled investors rely less on public information.

mentioning

confidence: 57%

Disagreement between hedge funds and other institutional investors and the cross‐section of expected stock returns

Caglayan

Celiker

Sonaer

2022

Self Cite

“…Sell-side analysts, however, often keep their stock recommendations unchanged for extended periods, making them stale and biased. Hence, our investigation focuses only on analyst revisions, which contain more valuable information and are more trustworthy over time (see Caglayan et al, 2021;Jegadeesh et al, 2004;Jegadeesh & Kim, 2006, 2010Loh & Stulz, 2018;Stickel, 1995;Womack, 1996).…”

Section: Sample Selection and Descriptionmentioning

confidence: 99%

The price impact of analyst revisions and the state of the economy: Evidence around the world

2023

This paper examines the price impact of analyst revisions in distinct economic states around the world. We find stronger average 2‐day cumulative abnormal returns in bad times, though this pattern is mainly observed in developed countries. In addition, trading strategies following analyst revisions, with holding periods from 1 to 6 months, are generally more profitable in good times with lower macroeconomic uncertainty, after controlling for market and common risk factors. The profitability, however, disappears or declines substantially after accounting for time‐varying risk premia conditioned on lagged macroeconomic information, indicating a reduced information production role played by analysts in recent decades.

“…Therefore, FIs are an effective corporate governance mechanism to monitor the controlling shareholders’ investment decisions (Kim et al., 2016). FIs can urge firms to engage in high‐quality corporate disclosure and increase resources for information production and analysis, thereby decreasing information asymmetry and improving the quality of the information environment (Bae et al., 2006; Caglayan et al., 2021; Tsang et al., 2019). Moreover, with equal access to market‐wide news for all investors, the superior capability of FIs to act faster on common information ensures that they are likely to be efficient processors of common information.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

Do foreign investors crowd out sell‐side analysts? Evidence from China

Cheng

Kong

Zheng

et al. 2022

This paper examines whether foreign investors (FIs) affect the information production of analysts. Based on China's stock market, we find that FIs significantly reduce analysts' coverage. Such negative association is more pronounced in firms with a high level of governance and information disclosure and varies with analyst characteristics. We also identify two possible economic mechanisms: the information channel and the governance channel. Further tests suggest that as FIs crowd out analysts, the number of research reports and brokerage site visits decreased, but analyst forecast accuracy improved, indicating that the demand and supply of information are generally in equilibrium. We further address the endogeneity issue using a change-on-change analysis and a quasi-natural experiment, the Shanghai-Hong Kong Stock Connect (S-HKSC), and the results still hold. Overall, our results present evidence of potential information production by FIs, providing policy implications and highlighting the positive effect of China's open-door policy in capital markets.