Whose money is smart? Individual and institutional investors’ trades based on analyst recommendations

Dongmin KONG, Chen LIN, Shasha LIU, Weiqiang TAN

Research output: Contribution to journalArticlespeer-review

Abstract

This study explores how institutional and individual investors respond to analyst recommendations. Using a unique account-level trading dataset taken from the Shanghai Stock Exchange, we obtain direct evidence to show that (1) active institutional investors are significantly net buyers (net sellers) on “strong buy” and “buy” (“hold” and “sell”) recommendations; (2) active institutional investors condition their trades based on the buy-side pressure of analysts; (3) institutional investors earn abnormal returns by incorporating analysts’ buy-side pressure into their trading reactions to analyst recommendations; and (4) individual investors, in contrast, exhibit abnormal trade reactions opposite to those of active institutional investors. Our results are robust to alternative measures and different specifications. This study provides evidence that active institutional investors are more sophisticated processors of information and provides support for regulators’ concerns about the sub-optimal investment decisions made by individual investors who are unaware of the potential conflicts of interest analysts may face. Copyright © 2021 Elsevier B.V. All rights reserved.
Original languageEnglish
Pages (from-to)234-251
JournalJournal of Empirical Finance
Volume62
Early online date21 Apr 2021
DOIs
Publication statusE-pub ahead of print - 21 Apr 2021

Citation

Kong, D., Lin, C., Liu, S., & Tan, W. (2021). Whose money is smart? Individual and institutional investors’ trades based on analyst recommendations. Journal of Empirical Finance, 62, 234-251. doi: 10.1016/j.jempfin.2021.04.001

Keywords

  • Analyst recommendation
  • Individual/institutional investors
  • Buy-side pressure

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