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
University of Maryland - Robert H. Smith School of Business
March 14, 2013
Management Science, Forthcoming
AFA 2010 Atlanta Meetings Paper
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
Date posted: March 22, 2009 ; Last revised: May 23, 2013
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