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Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices

Management Science, Forthcoming

AFA 2010 Atlanta Meetings Paper

37 Pages Posted: 22 Mar 2009 Last revised: 23 May 2013

Nerissa C. Brown

University of Delaware - Accounting & MIS

Kelsey D. Wei

University of Texas at Dallas

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Date Written: March 14, 2013

Abstract

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.

Keywords: analyst revisions, mutual fund herding, managerial myopia

JEL Classification: M40, M41, G23

Suggested Citation

Brown, Nerissa C. and Wei, Kelsey D. and Wermers, Russ, Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices (March 14, 2013). Management Science, Forthcoming; AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1363837 or http://dx.doi.org/10.2139/ssrn.1363837

Nerissa C. Brown

University of Delaware - Accounting & MIS ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

Kelsey D. Wei (Contact Author)

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States
9728835978 (Phone)

Russell R. Wermers

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

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