Abstract

http://ssrn.com/abstract=1363837
 
 

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Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices


Nerissa C. Brown


University of Delaware - Alfred Lerner College of Business and Economics

Kelsey D. Wei


University of Texas at Dallas

Russ Wermers


University of Maryland - Robert H. Smith School of Business

March 14, 2013

Management Science, Forthcoming
AFA 2010 Atlanta Meetings Paper

Abstract:     
This paper documents that mutual funds “herd” (trade together) into stocks with consensus sell-side analyst upgrades, and herd out of stocks with consensus downgrades. This influence of analyst revisions on fund herding is stronger for downgrades, and among managers with greater career concerns. These findings indicate that career-concerned managers are incentivized to follow analyst information, and have a greater tendency to herd on negative stock information, given the greater reputational and litigation risk of holding losing stocks. Further, during the more recent period (when aggregate mutual fund equity ownership is significantly higher), stocks traded by career-concerned herds of fund managers in response to analyst revisions experience a significant same-quarter price impact, followed by a sharp subsequent price reversal. Our evidence suggests that analyst recommendation revisions induce herding by career-concerned fund managers, and that this type of trading has become price-destabilizing with the increasing level of mutual fund ownership of stocks.

Number of Pages in PDF File: 37

Keywords: analyst revisions, mutual fund herding, managerial myopia

JEL Classification: M40, M41, G23

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Date posted: March 22, 2009 ; Last revised: May 23, 2013

Suggested Citation

Brown, Nerissa C. and Wei, Kelsey D. and Wermers, Russ, Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices (March 14, 2013). Management Science, Forthcoming; AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1363837 or http://dx.doi.org/10.2139/ssrn.1363837

Contact Information

Nerissa C. Brown
University of Delaware - Alfred Lerner College of Business and Economics ( email )
Newark, DE 19716
United States
Kelsey D. Wei (Contact Author)
University of Texas at Dallas ( email )
P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)
Russell R. Wermers
University of Maryland - Robert H. Smith School of Business ( email )
Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)
HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/
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