Above and Beyond Recommendations: How Analysts Add Value to Their Fund Clients

69 Pages Posted: 6 Apr 2014

See all articles by Lei Xie

Lei Xie

AQR Capital Management, LLC

Date Written: April 4, 2014


This paper examines whether the sell-side research industry adds value to its mutual fund clients. I use a novel way to identify the broker-mutual fund network. I find that, within a mutual fund’s portfolio, the stocks covered by the fund’s brokers outperform the uncovered stocks by 6.3% per year, on average. This supports the view that sell-side analysts add value to their clients by helping them make better investment decisions. I further test whether the value added can be attributed to private communications between analysts and their clients. First, I find that, before an analyst releases a negative (positive) recommendation on a stock, her clients sell (buy) significantly more of the stock than do non-clients. Second, among stocks with a strong buy recommendation, those bought by clients before the recommendation announcements earn a 120-day post-recommendation abnormal return that is 1.78% higher, on average, than those sold by clients before the recommendations. These results suggest that brokers help their clients gain an information advantage over non-clients by providing private services and information. Overall, the paper helps to make sense of the existence and size of the sell-side research industry.

Keywords: sell-side analyst, mutual fund, recommendation

JEL Classification: G14, G23

Suggested Citation

Xie, Lei, Above and Beyond Recommendations: How Analysts Add Value to Their Fund Clients (April 4, 2014). Available at SSRN: https://ssrn.com/abstract=2420442 or http://dx.doi.org/10.2139/ssrn.2420442

Lei Xie (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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