Whose Money is Smart? Individual and Institutional Investors’ Trades Based on Analyst Recommendations

51 Pages Posted: 4 Aug 2016 Last revised: 13 May 2020

See all articles by Dongmin Kong

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology; School of Finance, Zhongnan University of Economics and Law

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Shasha Liu

School of Management, Jinan University

Weiqiang Tan

Education University of Hong Kong

Date Written: June 1, 2019

Abstract

We explore how institutional and individual investors respond to analyst recommendations. Using a unique account-level trading dataset from the China, we find that 1) institutions are significantly net buyers (net sellers) on “strong buy” and “buy” (“hold” and “sell”) recommendations; 2) institutions condition their trades based on the buy-side pressure of analysts, corporate governance, and information transparency; 3) institutions earn abnormal returns through trades reacted to analyst recommendations; and 4) individuals, in contrast, trade in the direction against institutions. Our findings highlight the suboptimal investment decisions of individuals who are unaware of potential conflicts of interest that analysts may face.

Keywords: analyst recommendation; individual/institutional investors; buy-side pressure; information transparency; corporate governance.

JEL Classification: G11, G23

Suggested Citation

Kong, Dongmin and Lin, Chen and Liu, Shasha and Tan, Weiqiang, Whose Money is Smart? Individual and Institutional Investors’ Trades Based on Analyst Recommendations (June 1, 2019). Available at SSRN: https://ssrn.com/abstract=2818249 or http://dx.doi.org/10.2139/ssrn.2818249

Dongmin Kong (Contact Author)

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Shasha Liu

School of Management, Jinan University ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

Weiqiang Tan

Education University of Hong Kong ( email )

Dept of Social Sciences
Education University of Hong Kong
Tai Po, NT 11111
Hong Kong

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