Institutional Holdings and Analysts' Stock Recommendations

Posted: 26 Oct 2006 Last revised: 5 Mar 2014

See all articles by Xia Chen

Xia Chen

Singapore Management University - School of Accountancy

Qiang Cheng

Singapore Management University - School of Accountancy

Multiple version iconThere are 2 versions of this paper

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, institutional trading, stock recommendations

JEL Classification: G11, G14, G29, G23, M41

Suggested Citation

Chen, Xia and Cheng, Qiang, Institutional Holdings and Analysts' Stock Recommendations. Journal of Accounting, Auditing & Finance 21 (4): 399-440, Fall 2006, Available at SSRN: https://ssrn.com/abstract=940129

Xia Chen

Singapore Management University - School of Accountancy ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore

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