The Effectiveness of Institutional Investors in Evaluating Analysts
54 Pages Posted: 3 Feb 2012
Date Written: February 1, 2012
Using 1994-2009 data, we examine whether institutional investors are effective in evaluating analysts. All-American (AA) analysts elected by institutions through voting make buy and sell recommendations with up to 7% higher annualized risk-adjusted returns than other analysts. This performance differential exists both before and after AAs are elected, is not explained by announcement effect, and is not significantly eroded by Reg-FD. The AA status predicts performance in buys beyond other analyst characteristics. In response to labor market movements resulting from regulation changes around 2002-2003, institutional investors reshuffled the AA pool in a way that preserved its performance. Profits from AAs’ recommendations diminish quickly with access delay. We conclude that institutional investors are effective in evaluating analysts and that the AA status at least partially reflects skill. While institutional investors are well positioned to benefit from AAs’ views, other investors have limited ability to do so, consistent with Grossman and Stiglitz (1980).
Keywords: Institutional investors; performance evaluation; analyst skill; stock recommendations; star analysts; star status; reputation.
JEL Classification: G1, G2
Suggested Citation: Suggested Citation