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

See all articles by April Klein

April Klein

New York University (NYU) - Department of Accounting

Anthony Saunders

New York University - Leonard N. Stern School of Business

Yu Ting Forester Wong

University of Southern California - Leventhal School of Accounting

Date Written: April 7, 2014

Abstract

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

Klein, April and Saunders, Anthony and Wong, Yu Ting Forester, Is there a 'Quid Pro Quo' between Hedge Funds and Sell-Side Equity Analysts? (April 7, 2014). Available at SSRN: https://ssrn.com/abstract=2421801 or http://dx.doi.org/10.2139/ssrn.2421801

April Klein (Contact Author)

New York University (NYU) - Department of Accounting ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012
United States

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Yu Ting Forester Wong

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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