Is there a 'Quid Pro Quo' between Hedge Funds and Sell-Side Equity Analysts?
53 Pages Posted: 8 Apr 2014 Last revised: 18 Oct 2017
Date Written: April 7, 2014
We posit a “quid pro quo” in economic benefits between sell-side equity analysts and large hedge fund managers. We show that large hedge funds opportunistically trade one to four days prior to the publication of a recommendation change, a finding consistent with flow of information from an analyst to hedge funds. Next, we show that in return for the information provided, analysts benefit from: (1) better external evaluations and (2) higher trading commissions and fees for their brokerage firm. Notably, pre-trading occurs only when the analyst issuing the recommendations has a high external evaluation, and the analyst’ brokerage house is a prime broker to the hedge fund.
Keywords: Trading on private information; Hedge funds; Sell-side analysts
JEL Classification: G12; G23; G24
Suggested Citation: Suggested Citation