Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices
Management Science, Forthcoming
37 Pages Posted: 22 Mar 2009 Last revised: 23 May 2013
Date Written: March 14, 2013
Abstract
This paper documents that mutual funds “herd” (trade together) into stocks with consensus sell-side analyst upgrades, and herd out of stocks with consensus downgrades. This influence of analyst revisions on fund herding is stronger for downgrades, and among managers with greater career concerns. These findings indicate that career-concerned managers are incentivized to follow analyst information, and have a greater tendency to herd on negative stock information, given the greater reputational and litigation risk of holding losing stocks. Further, during the more recent period (when aggregate mutual fund equity ownership is significantly higher), stocks traded by career-concerned herds of fund managers in response to analyst revisions experience a significant same-quarter price impact, followed by a sharp subsequent price reversal. Our evidence suggests that analyst recommendation revisions induce herding by career-concerned fund managers, and that this type of trading has become price-destabilizing with the increasing level of mutual fund ownership of stocks.
Keywords: analyst revisions, mutual fund herding, managerial myopia
JEL Classification: M40, M41, G23
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Who Underreacts to Cash-Flow News? Evidence from Trading between Individuals and Institutions
By Randolph B. Cohen, Paul A. Gompers, ...
-
Individual Investor Sentiment and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
Individual Investor Trading and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
Individual Investor Sentiment and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
Individual Investor Sentiment and Stock Returns
By Ron Kaniel, Gideon Saar, ...
-
The Dynamics of Institutional and Individual Trading
By John M. Griffin, Selim Topaloglu, ...
-
Institutional Investors and Equity Returns: Are Short-Term Institutions Better Informed?
By Zhe Zhang and Xuemin Sterling Yan
-
Momentum Trading by Institutions
By S.g. Badrinath and Sunil Wahal
-
Daily Momentum and Contrarian Behavior of Index Fund Investors