Monitors or Predators: The Influence of Institutional Investors on Sell-side Analysts

Abstract

Regulators and the investment community have been concerned that institutional investors pressure financial analysts through trading commission fees to issue optimistic opinions in support of their stock positions. We use a unique dataset that identifies mutual fund companies’ allocation of trading commission fees to individual brokerages and provide direct evidence on this issue. In particular, we show that for stocks that the fund companies have taken large positions in, analysts are more optimistic in their stock recommendations when their brokerages receive trading commission fees from these fund companies. The relationship is stronger when the commission fee pressure is greater. The market reacts less favorably to the “Strong Buy” recommendations of analysts facing greater commission fee pressure. The funds also respond negatively to such recommendations in making portfolio adjustments. These results point to a source of analyst bias that has been little explored in the literature.

Keywords: Trading Commission Fees, Analyst Bias, Stock Recommendations, Institutional Investors

JEL Classification: G10, G24, G29, M40