Short-Term Institutions, Analyst Recommendations, and Mispricing

47 Pages Posted: 19 Dec 2012 Last revised: 16 Jul 2019

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Ankur Pareek

University of Nevada, Las Vegas - Lee Business School, University of Nevada - Las Vegas

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH; European Corporate Governance Institute (ECGI)

Date Written: July 15, 2019

Abstract

We document that the interplay between short-term investors and extreme analyst recommendations results in temporary mispricing with predictable and large stock price reversals. In particular, U.S. stocks held by short-term investors with currently optimistic (pessimistic) recommendations exhibit large past outperformance (underperformance), followed by large negative (positive) future alphas. The return reversals originate largely from overreactions to the announcements of past recommendation releases. We corroborate these results in out-of-sample tests for a large set of international stocks. Our results are consistent with models of higher-order beliefs where short-term investors coordinate their trading around public information signals.

Keywords: Short-term institutions; Analyst recommendations; Mispricing

Suggested Citation

Cremers, K. J. Martijn and Pareek, Ankur and Sautner, Zacharias, Short-Term Institutions, Analyst Recommendations, and Mispricing (July 15, 2019). Available at SSRN: https://ssrn.com/abstract=2190437 or http://dx.doi.org/10.2139/ssrn.2190437

K. J. Martijn Cremers

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Ankur Pareek (Contact Author)

University of Nevada, Las Vegas - Lee Business School, University of Nevada - Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

Zacharias Sautner

Frankfurt School of Finance & Management gemeinnützige GmbH ( email )

Sonnemannstraße 9-11
Frankfurt am Main, 60314
Germany

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

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