The Relation between Securities Firms' Mutual Fund Equity Holdings and Their Analysts' Earnings Forecasts

44 Pages Posted: 7 Apr 1998

See all articles by Paul J. Irvine

Paul J. Irvine

Neeley School of Business

Paul J. Simko

University of Virginia - Darden School of Business

Siva Nathan

Georgia State University

Date Written: February 1998

Abstract

This study examines the relation between changes in portfolio composition of brokerage-owned mutual funds and earnings forecasts of sell-side analysts employed by the same firm. We find that these analysts are consistently optimistic for securities that represent new investments for their mutual fund families and consistently pessimistic for those divested. For new investments, optimism becomes significantly more pronounced after affiliated mutual fund managers have added the security to their portfolios. Forecast accuracy begins to significantly decline during periods coincident with the security purchase. For complete divestitures, pessimism is most pronounced in periods that are concurrent with the fund's divestiture, but we document no significant decline in forecast accuracy. In addition, we find that affiliated analysts tend to cease coverage of a security after their brokerages' mutual funds divest. The findings have implications for regulators monitoring brokerage firms' activities, for researchers who use analysts' earnings forecasts as proxies for market expectations, and for investors who rely on sell-side analysts' earnings forecasts.

JEL Classification: G23, G24, G29, M41

Suggested Citation

Irvine, Paul J. and Simko, Paul and Nathan, Siva, The Relation between Securities Firms' Mutual Fund Equity Holdings and Their Analysts' Earnings Forecasts (February 1998). Available at SSRN: https://ssrn.com/abstract=74388 or http://dx.doi.org/10.2139/ssrn.74388

Paul J. Irvine

Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Paul Simko

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-1391 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/simko.htm

Siva Nathan (Contact Author)

Georgia State University ( email )

P.O. Box 4050
Atlanta, GA 30302-4050
United States
404-413-7225 (Phone)

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