Whose Money is Smart? Individual and Institutional Investors’ Trades Based on Analyst Recommendations

We explore how institutional and individual investors respond to analyst recommendations. Using a unique account-level trading dataset from the China, we find that 1) institutions are significantly net buyers (net sellers) on “strong buy” and “buy” (“hold” and “sell”) recommendations; 2) institutions condition their trades based on the buy-side pressure of analysts, corporate governance, and information transparency; 3) institutions earn abnormal returns through trades reacted to analyst recommendations; and 4) individuals, in contrast, trade in the direction against institutions. Our findings highlight the suboptimal investment decisions of individuals who are unaware of potential conflicts of interest that analysts may face.

Keywords: analyst recommendation; individual/institutional investors; buy-side pressure; information transparency; corporate governance.

JEL Classification: G11, G23

Suggested Citation: Suggested Citation

Kong, Dongmin and Lin, Chen and Liu, Shasha and Tan, Weiqiang and Tan, Weiqiang, Whose Money is Smart? Individual and Institutional Investors’ Trades Based on Analyst Recommendations (June 1, 2019). Available at SSRN: https://ssrn.com/abstract=2818249 or http://dx.doi.org/10.2139/ssrn.2818249