Political Bias of Stock Analysts and Investors’ Trades
52 Pages Posted: 4 Aug 2016 Last revised: 13 Jun 2019
Date Written: June 2019
Using a unique database that contains precise investor classifications and all transaction records for firms listed in the Shanghai Stock Exchange of China, we explore whether institutional and individual investors perceive and correct the potential analyst bias caused by political ties between brokerage firms and state-owned enterprises. We find that: 1) institutions are significantly net buyers (net sellers) on “strong buy” and “buy” (“hold” and “sell”) recommendations, while individuals trade in the opposite direction of institutions, 2) analysts release more optimistic recommendations on stocks owned by the same local government as their brokerage firms, and 3) institutional investors effectively learn and react to analysts’ recommendation bias caused by political pressure.
Keywords: Analyst recommendation, Individual/institutional investors, Political pressure
JEL Classification: G11, G14, G24, M41.
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