Wealth Transfer Effects of Analysts' Misleading Behavior

40 Pages Posted: 11 Dec 2007

See all articles by Gus De Franco

Gus De Franco

Tulane University - A.B. Freeman School of Business

Hai Lu

University of Toronto - Rotman School of Management

Florin P. Vasvari

London Business School

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Abstract

We investigate a sample of 50 firm-events, identified in the Global Research Analysts Settlement, in which analysts were discovered to have acted misleadingly ex post. In this setting, analysts' incentives caused them to issue public disclosures that differed from their private beliefs. We document that these firms' institutional holdings decline significantly during the period in which the analysts issued misleading disclosures. During this period daily small-size trades (a proxy for individual investors) are dominated by buy orders while daily large-size trades (a proxy for institutional investors) are dominated by sell orders. Short interest increases during the event period, consistent with the idea that sophisticated investors are selling. Our estimates of investors' trading losses show that individual investors lost about two and a half times the amount lost by institutions. Overall, the results suggest a wealth transfer from individuals to institutions that is likely attributable to analysts' misleading behavior.

Suggested Citation

De Franco, Gus and Lu, Hai and Vasvari, Florin P., Wealth Transfer Effects of Analysts' Misleading Behavior. Journal of Accounting Research, Vol. 45, No. 1, pp. 71-110, March 2007, Available at SSRN: https://ssrn.com/abstract=1065861 or http://dx.doi.org/10.1111/j.1475-679X.2007.00228.x

Gus De Franco (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Hai Lu

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Florin P. Vasvari

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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