Analyst Forecasts and European Mutual Fund Trading
49 Pages Posted: 16 Aug 2012 Last revised: 31 Jul 2013
Date Written: March 28, 2013
This paper addresses the questions whether European mutual fund managers rely on sell-side analyst information with respect to their investment decisions and whether this behavior impacts fund performance. Based on a sample of over 4,300 European mutual funds and around 1.2 million portfolio changes, we not only use consensus stock recommendations and earnings forecast revisions as forecast measures but, additionally, focus on implied return revisions, based on target prices.
Results show that European mutual funds significantly increase (decrease) their holdings in stocks when any of the three consensus forecast measures increases (decreases) within the quarter prior to the observation period. Further results show that mutual fund managers primarily attribute high information value to consensus forecast revisions that contain positive information, that are based on a sufficiently high number of inputs, and with more unanimous inputs to the consensus. Additionally, the informativeness of analyst forecast revisions for mutual fund trading increases in the level of foreign institutional ownership. Finally, following sell-side research seems to be beneficial for mutual fund managers since our results show that stock trades that are in line with analyst forecast revisions significantly outperform trades that are contrary to analyst research.
Keywords: Mutual fund trading, sell-side analyst reports, consensus forecasts, forecast dispersion, ownership structure, institutional investors, mutual fund performance
JEL Classification: G11, G15, G23, G24, G32, G34
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