Institutional Holdings and Analysts' Stock Recommendations

51 Pages Posted: 3 May 2002

See all articles by Xia Chen

Xia Chen

Singapore Management University

Qiang Cheng

Singapore Management University

Multiple version iconThere are 2 versions of this paper

Date Written: October 2005

Abstract

Prior studies document that institutional investors outperform the market. We investigate whether this superior performance is partly derived from institutional investors' use of sell-side analysts' stock recommendations. First, we find that the quarterly change in institutional ownership is positively correlated with consensus recommendations. After controlling for other determinants of institutional holdings, the quarterly change in institutional ownership is on average 0.90% higher for firms with favorable recommendations than for those with unfavorable recommendations. Second, using large trades to proxy for institutional trading, we find that there are more buyer-initiated than seller-initiated large trades around favorable recommendations and vice versa for unfavorable recommendations. Lastly, we find that the change in institutional ownership that is explained by stock recommendations is associated with positive abnormal returns in the future, about 4.2% per year. Overall, these results indicate that institutional investors trade upon stock recommendations and such trading contributes to their superior performance.

Keywords: Financial analysts, stock recommendations, institutional trading

JEL Classification: G11, G14, G2, M4

Suggested Citation

Chen, Xia and Cheng, Qiang, Institutional Holdings and Analysts' Stock Recommendations (October 2005). Sauder School of Business Working Paper, Available at SSRN: https://ssrn.com/abstract=309842 or http://dx.doi.org/10.2139/ssrn.309842

Xia Chen

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

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