Hedge Funds and Their Prime Broker Analysts

47 Pages Posted: 6 Apr 2021 Last revised: 26 Apr 2021

See all articles by Sung Gon Chung

Sung Gon Chung

Wayne State University

Manoj Kulchania

Wayne State University - Finance Group

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Date Written: February 19, 2021

Abstract

Are sell-side analysts reluctant to go against the investment views of their hedge funds when these hedge funds are their prime brokerage clients? We show that prime broker analysts tend to upgrade stocks recently bought by their clients. For stocks with upgraded recommendations, post-announcement cumulative abnormal returns are significantly lower for those purchased by the prime brokerage clients. Our results are stronger with high-dollar-turnover clients who generate more trading commissions. We also find that a hedge fund with a large bet on a stock has a stronger incentive to pressure the fund’s prime brokers to issue a favorable recommendation on the stock. Results are not driven by stocks of firms with low analyst coverage or small size.

Suggested Citation

Chung, Sung Gon and Kulchania, Manoj and Teo, Melvyn, Hedge Funds and Their Prime Broker Analysts (February 19, 2021). Available at SSRN: https://ssrn.com/abstract=3820218

Sung Gon Chung (Contact Author)

Wayne State University ( email )

Detroit, MI 48202
United States

Manoj Kulchania

Wayne State University - Finance Group ( email )

2771 Woodward Ave
Detroit, MI 48201
United States
313-577-7837 (Phone)

HOME PAGE: http://ilitchbusiness.wayne.edu/profile/fr3472

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

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