Institutional Investor Preferences for Analyst Forecast Accuracy: Does Investment Strategy Matter?

43 Pages Posted: 17 Jan 2011

See all articles by Natalia M. Mintchik

Natalia M. Mintchik

University of Cincinnati - Department of Accounting

Pamela S. Stuerke

University of Missouri at Saint Louis

Gaiyan Zhang

University of Missouri at St. Louis - College of Business Administration

Ashley Wang

Federal Reserve Board

Date Written: January 16, 2011

Abstract

In this study, we separate institutional investors into the categories of transient, dedicated, and quasi-indexer and examine whether the ownership percentages of these different types of institutional investors are associated with the accuracy of analysts’ earnings forecasts. We hypothesize a positive association between ownership by transient investors and earnings forecast accuracy, as forecast accuracy may be a signal of decreased price impact of trades and increased profit trading opportunities. We predict a negative association between ownership by dedicated investors and earnings forecast accuracy because more accurate forecasts eliminate dedicated investors’ informational advantage. Finally, we predict that forecast accuracy is not relevant for the investment decisions of quasi-indexers.

Our empirical evidence suggests that transient investors are indeed drawn to companies with lower forecast errors and increase (decrease) their holdings when forecast errors decrease (increase). However, the evidence on the behavior of dedicated investors and quasi-indexers reveals more complex decision pattern, consistent with investment decisions not driven by analysts’ information. Dedicated investors’ ownership decreases with forecast accuracy, especially earnings are lower than forecasts, and are more likely to increase ownership levels when forecast accuracy decreases. Quasi-indexers appear to reduce ownership as forecast accuracy decreases, but only when earnings exceed forecasts.

These findings highlight the importance to adjust for investors’ heterogeneity in research models rather than to cast institutional investors as a homogeneous group. Our findings also indicate that attempts to achieve "predictable earnings" appeal primarily to one type of institutional investors: transient.

Suggested Citation

Mintchik, Natalia M. and Stuerke, Pamela S. and Zhang, Gaiyan and Wang, Ashley, Institutional Investor Preferences for Analyst Forecast Accuracy: Does Investment Strategy Matter? (January 16, 2011). CAAA Annual Conference 2011, Available at SSRN: https://ssrn.com/abstract=1742008 or http://dx.doi.org/10.2139/ssrn.1742008

Natalia M. Mintchik

University of Cincinnati - Department of Accounting ( email )

Cincinnati, OH 45221-0211
United States

Pamela S. Stuerke (Contact Author)

University of Missouri at Saint Louis ( email )

8001 Natural Bridge Road
St. Louis, MO 63121
United States
314 516-6132 (Phone)
314 516-6420 (Fax)

Gaiyan Zhang

University of Missouri at St. Louis - College of Business Administration ( email )

One University Blvd
St. Louis, MO 63121
United States

Ashley Wang

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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