Is there a 'Quid Pro Quo' between Hedge Funds and Sell-Side Equity Analysts?

Journal of Portfolio Management [Forthcoming]

Posted: 8 Apr 2014 Last revised: 25 Aug 2019

See all articles by April Klein

April Klein

New York University (NYU) - Department of Accounting

Anthony Saunders

New York University - Leonard N. Stern School of Business

Yu Ting Forester Wong

University of Southern California - Leventhal School of Accounting

Date Written: August 7, 2019

Abstract

In this article, the authors posit a quid pro quo in economic benefits between sell-side equity analysts and large hedge fund managers. They show that large hedge funds opportunistically trade one to four days prior to the publication of a recommendation change, a finding consistent with flow of information from analysts to hedge funds. Next, the authors demonstrate that in return for the information provided, analysts benefit from (1) better external evaluations and (2) higher trading commissions and fees for their brokerage firm. Notably, pre-trading occurs only when the analyst issuing the recommendations has a high external evaluation and the analyst’s brokerage house is a prime broker to the hedge fund.

Keywords: Trading on private information; Hedge funds; Sell-side analysts

JEL Classification: G12; G23; G24

Suggested Citation

Klein, April and Saunders, Anthony and Wong, Yu Ting Forester, Is there a 'Quid Pro Quo' between Hedge Funds and Sell-Side Equity Analysts? (August 7, 2019). Journal of Portfolio Management [Forthcoming], Available at SSRN: https://ssrn.com/abstract=2421801 or http://dx.doi.org/10.2139/ssrn.2421801

April Klein (Contact Author)

New York University (NYU) - Department of Accounting ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012
United States

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Yu Ting Forester Wong

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States

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