Short-Term Institutions, Analyst Recommendations, and Mispricing: The Role of Higher-Order Beliefs

Cremers, Martijn; Pareek, Ankur; Sautner, Zacharias

doi:10.2139/ssrn.2190437

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Short-Term Institutions, Analyst Recommendations, and Mispricing: The Role of Higher-Order Beliefs

62 Pages Posted: 19 Dec 2012 Last revised: 16 Jan 2021

See all articles by Martijn Cremers

Ankur Pareek

Bucknell University, Freeman College of Management

Zacharias Sautner

University of Zurich - Department of Finance; Swiss Finance Institute; European Corporate Governance Institute (ECGI)

There are 2 versions of this paper

Date Written: January 16, 2021

Abstract

We document that stocks that have optimistic (pessimistic) consensus recommendations and are currently held by many short-term institutions exhibit large stock-return reversals: their large past outperformance (underperformance) is followed by large negative (positive) future alphas. The predictable return reversals originate from overreaction to past recommendation releases and the correction of these overreactions around future releases. Results are stronger when earnings news is released and at firms with higher fundamental uncertainty. Further, firms with more short-term institutions show stronger announcement returns and price drift after recommendation changes. Our results are consistent with models of higher-order beliefs where short-term institutions coordinate trading around public signals.

Keywords: Short-term Institutions; Analyst Recommendations; Mispricing; Higher-Order Beliefs

JEL Classification: G12, G14, M40

Suggested Citation: Suggested Citation

Cremers, K. J. Martijn and Pareek, Ankur and Sautner, Zacharias, Short-Term Institutions, Analyst Recommendations, and Mispricing: The Role of Higher-Order Beliefs (January 16, 2021). Available at SSRN: https://ssrn.com/abstract=2190437 or http://dx.doi.org/10.2139/ssrn.2190437