Wealth Transfer Effects of Analysts' Misleading Behavior

48 Pages Posted: 8 May 2006

See all articles by Gus De Franco

Gus De Franco

Tulane University - A.B. Freeman School of Business

Hai Lu

University of Toronto - Rotman School of Management

Florin P. Vasvari

London Business School

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Abstract

We investigate a sample of 50 firm events, identified in the Global Research Analysts Settlement, in which analysts were discovered to have acted misleadingly ex-post. In this setting, analysts' incentives caused them to issue public disclosures that differed from their private beliefs. We document that these firms' institutional holdings decline significantly during the period in which the analysts issued misleading disclosures. During this period daily small-size trades (a proxy for individual investors) are dominated by buy orders while daily large-size trades (a proxy for institutional investors) are dominated by sell orders. Short interest increases during the event period, consistent with the idea that sophisticated investors were selling. Our estimates of investors' trading losses show that individual investors lost about 2 1/2 times the amount lost by institutions. Overall, the results suggest a wealth transfer from individuals to institutions that is likely attributable to analysts' misleading behavior.

Keywords: Global Settlement, Security Analysts, Conflicts of Interest, Institutional Holdings

JEL Classification: G12, G14, G28, G29, G34, M41

Suggested Citation

De Franco, Gus and Lu, Hai and Vasvari, Florin P., Wealth Transfer Effects of Analysts' Misleading Behavior. Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=899971

Gus De Franco (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Hai Lu

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Florin P. Vasvari

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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