The Benefits of Proximity to Equity Analysts

Abstract

Prior research shows that analyst revisions are important information events and that some investors trade ahead of them. However, it remains unclear which investors trade ahead and what the financial consequences of such trades are. To address these questions, we combine local and foreign analyst revisions with comprehensive, high-frequency trading information from the Korea Exchange. We validate that both local and foreign analyst revisions meaningfully affect stock prices. We then show that only asset managers who are geographically and socially close to local analysts anticipate their revisions before the public release, and this anticipation is stronger for revisions by analysts that are ranked more highly by buy-side investors. Lastly, although local asset managers typically lose money when trading against foreign professionals who behave like skilled market makers, their ability to anticipate local analyst revisions tips the scales in their favor: local hedge funds earn greater excess profits on trades transacted ahead of local analyst revisions than all other professional investor groups combined. Overall, our evidence highlights that tips from local brokerages shift the competitive balance between domestic institutions and market makers and that access to tips depends on investor sophistication, geographic proximity, and cultural affinity.

Keywords: Geographic Proximity, Social Proximity, Sell-Side Analysts, Analyst Recommendations, Wealth Transfers

JEL Classification: G12, G14, G15, G23