Sell-Side Analysts’ Responses to Mutual Fund Trading Pressure

52 Pages Posted: 23 Jan 2011 Last revised: 20 Mar 2014

See all articles by Johan Sulaeman

Johan Sulaeman

National University of Singapore (NUS) - Department of Finance

Kelsey D. Wei

University of Texas at Dallas

Date Written: March 2014

Abstract

This paper illustrates the unique role of sell-side analysts in improving market efficiency by examining their responses to mutual fund flow-driven mispricing. We find that a select group of analysts persistently issue price-correcting recommendation changes for stocks subject to flow-driven mispricing while making little change to their concurrent earnings forecasts for the underlying firms, suggesting that their recommendation changes are driven by stock mispricing rather than cash flow-related information. The responses of mispricing-sensitive analysts appear to be skill related as they also tend to make superior stock recommendations and earnings forecasts in the past. Furthermore, fire-sale stocks upgraded and fire-purchase stocks downgraded by mispricing-sensitive analysts experience less liquidity deterioration and greater price correction immediately following analyst recommendation changes. Correspondingly, they exhibit smaller return reversals in the long run. Our findings suggest that mispricing-sensitive analysts play an important role in stabilizing the financial market.

Suggested Citation

Sulaeman, Johan and Wei, Kelsey D., Sell-Side Analysts’ Responses to Mutual Fund Trading Pressure (March 2014). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1744526 or http://dx.doi.org/10.2139/ssrn.1744526

Johan Sulaeman

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://sites.google.com/site/johansulaeman/

Kelsey D. Wei (Contact Author)

University of Texas at Dallas ( email )

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

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