Monitors or Predators: The Influence of Institutional Investors on Sell-side Analysts

51 Pages Posted: 25 Apr 2010 Last revised: 18 Jul 2012

See all articles by Zhaoyang Gu

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy

Zengquan Li

Shanghai University of Finance and Economics - School of Accountancy

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Date Written: July 18, 2012

Abstract

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

Gu, Zhaoyang and Li, Zengquan and Yang, Yong George, Monitors or Predators: The Influence of Institutional Investors on Sell-side Analysts (July 18, 2012). Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1595262 or http://dx.doi.org/10.2139/ssrn.1595262

Zhaoyang Gu

Chinese University of Hong Kong - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

Zengquan Li (Contact Author)

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin, N.T.
Hong Kong

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