The distorting effect of the prudent-man laws on institutional equity investments

There exists a substantial divide between the empirical and survey evidence regarding the influence of sell-side analyst recommendations on the trading of mutual funds. While surveys of fund managers suggest that they assign little weight to analyst recommendations, the empirical evidence suggests their trading is heavily influenced by analyst recommendations. Nonetheless, the existing empirical evidence does not readily yield robust inferences as to the direction of causality in the relation between the trading of mutual funds and analyst recommendations. Our study thus meets the pressing need to undertake a large-sample empirical study to understand the behaviour of these important capital market participants.Employing a robust research design and using a sample many times larger than those used in prior studies, we document a positive association between quarterly changes in mutual fund holdings and analyst recommendations at the consensus and individual analyst level. Our results thus contradict the survey evidence and suggest that the trading of mutual funds is influenced by the recommendations of sell-side analysts. Moreover, we find that analysts included in the Institutional Investor All-American Research Team exert significantly more influence on the trading of mutual funds than their less heralded peers.

Section: Aggregate Institutional Ownership and Consensus Recommendaticontrasting

confidence: 89%

The Impact of Security Analyst Recommendations Upon the Trading of Mutual Funds

Costello

Hall

2011

“…Prior literature [e.g., Falkenstein (1996), Del Guercio (1996, Gompers and Metrick (2001), and Bennett, Sias, and Starks (2003)] has examined the relation between institutional holdings and firm characteristics. They document that institutional investors prefer certain firm characteristics such as size, share price, and turnover.…”

Section: Preferences Of Short-and Long-term Institutional Investorsmentioning

confidence: 99%

Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?

Zhang

Yan

2006

We show that the positive relation between institutional ownership and future stock returns documented in Gompers and Metrick (2001) is driven by shortterm institutions. Furthermore, short-term institutions' trading forecasts future stock returns. This predictability does not reverse in the long run and is stronger for small and growth stocks. Short-term institutions' trading is also positively related to future earnings surprises. By contrast, long-term institutions' trading does not forecast future returns, nor is it related to future earnings news. Our results are consistent with the view that short-term institutions are better informed and they trade actively to exploit their informational advantage. (JEL G12, G14, G20) This article examines the relation between institutions' investment horizons and their informational roles in the stock market. Although a large body of literature has studied the behavior of institutional trading and its impact on asset prices and returns, 1 the informational role of institutional investors remains an open question. Gompers and Metrick (2001) document a positive relation between institutional ownership and future stock returns. However, they attribute this relation to temporal demand shocks rather than institutions' informational advantage. Nofsinger and Sias (1999) find that changes in institutional ownership forecast next year's returns, suggesting that institutional trading contains information about future returns. In contrast, Cai and Zheng (2004) find that institutional tradingWe thank

“…Supposedly, the existence of factors that differentiate bank-affiliated managed funds from the rest of the market offerings may be relevant to their unique ability to attract bank deposits. After analysing the portfolio composition of institutional investment managers, Del Guercio (1996) finds that amongst US managed fund operators, "bank managers are more sensitive to prudent-man laws" and suggests that prudent-man laws may force bank-managed funds to tilt their portfolio compositions in ways that may, over time, explain the performance differences between them and non-bank funds. Koppenhaver (1999) examines money market mutual funds and, finding that funds affiliated with banks outperform those sponsored by other financial institutions, advances the argument that the abnormal performance may be due to bank expertise in dealing with money market securities and issuers.…”

Section: Research Related To Bank Participation In Funds Managementmentioning

confidence: 99%

“…See Del Guercio (1996) and Cabot (1998) for historical accounts. In the Australian context, the equivalent of prudent-man laws are the fiduciary responsibilities imposed on fund managers by the Managed Investments Act.…”

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confidence: 99%

Effects of Bank Funds Management Activities on the Disintermediation of Bank Deposits

Allen

Parwada²

2002

This study investigates the alleged disintermediation of banks' traditional deposit-taking in favour of investment management activities. Using data on Australian bank-affiliated funds and a nine-year record of the parent banks' liability balances, this study finds that managed funds do not displace bank liabilities. Prudential capital adequacy requirements dissuade banks from using in-house managed investments as indirect conduits for raising funds in the same manner as deposit-taking.