Files
Abstract
This dissertation is comprised of two essays on analyst recommendations and investor trading behavior. The first essay investigates the trading behavior of institutional investors immediately prior to the release of analysts initial buy and strong buy recommendations. Using a proprietary database of institutional orders from the Plexus Group, we document abnormally high trading volume and abnormally large buying imbalances beginning five days before initial recommendations are publicly released. We confirm that buying prior to the recommendation release generates positive abnormal trading profits. Furthermore, the magnitude of the trading imbalances are related to variables that are typically associated with positive price responses to initiations, including strong buy recommendations, the analyst being an all-star analyst, and lower prior dispersion in analysts forecasts. Taken together, our results suggest that some institutional traders receive tips regarding the contents of the soon to be released analysts report. To the extent that brokerage firm clients who benefit from these tips are more likely to direct business to the initiating brokerage firm, tipping provides economic profits to the brokerage that can help defray the cost of analyst information gathering. Thus, while tipping benefits some traders at the expense of others, the welfare consequences of tipping are unclear. The second essay investigates lead-underwriter (affiliated) analyst optimism immediately following IPOs with regard to buy/sell recommendations and long-term growth estimates. Consistent with previous studies we find systematic evidence of affiliated analyst optimism with respect to long-term growth estimates. However, we find no evidence of optimism in regards to recommendations. Furthermore, event study findings suggest that market participants respond similarly to affiliated and unaffiliated analysts buy and strong buy recommendations. In contrast to buy recommendations, we document significantly more negative abnormal returns around affiliated analysts hold/sell recommendations. In general, our results suggest that affiliated analysts provide recommendations that are unbiased compared to unaffiliated analysts, and, in fact, may be more informative in the case of hold/sell recommendations.