The Impact of Fund Characteristics on the Use of Analyst Forecasts

Abstract

This paper builds on recent empirical studies that document the general impact of analyst recommendations on mutual fund trading. We argue that the use of analyst research might be a strategic decision depending on the type of mutual fund. Therefore, we identify the funds that trade in accordance with and the funds that trade in contrast to analyst information and analyze the impact of fund characteristics on this investment behavior. Thereby, we detect that fund managers using analyst recommendations for most of their purchase decisions seem to disregard analysts’ opinions for their sales and vice versa. Furthermore, well-performing funds that owe some of their prior performance to following sell-side research seem to continue to do so with regard to their buying and selling decisions. Finally, we find some funds to be more persistent in their investment behavior with regard to the intensity they follow analyst forecasts. Particularly for large funds it seems to be difficult to frequently change investment strategies and previous levels to which fund managers employed analyst research are kept constant across consecutive periods.

Keywords: mutual fund trading, sell-side analyst reports, consensus forecasts, institutional investors

JEL Classification: G11, G15, G23, G24