Short-Term Institutions, Analyst Recommendations, and Mispricing
47 Pages Posted: 19 Dec 2012 Last revised: 16 Jul 2019
Date Written: July 15, 2019
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
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