Monitors or Predators: The Influence of Institutional Investors on Sell-side Analysts
51 Pages Posted: 25 Apr 2010 Last revised: 18 Jul 2012
Date Written: July 18, 2012
Regulators and the investment community have been concerned that institutional investors pressure financial analysts through trading commission fees to issue optimistic opinions in support of their stock positions. We use a unique dataset that identifies mutual fund companies’ allocation of trading commission fees to individual brokerages and provide direct evidence on this issue. In particular, we show that for stocks that the fund companies have taken large positions in, analysts are more optimistic in their stock recommendations when their brokerages receive trading commission fees from these fund companies. The relationship is stronger when the commission fee pressure is greater. The market reacts less favorably to the “Strong Buy” recommendations of analysts facing greater commission fee pressure. The funds also respond negatively to such recommendations in making portfolio adjustments. These results point to a source of analyst bias that has been little explored in the literature.
Keywords: Trading Commission Fees, Analyst Bias, Stock Recommendations, Institutional Investors
JEL Classification: G10, G24, G29, M40
Suggested Citation: Suggested Citation