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

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  • Kong, Dongmin
  • Lin, Chen
  • Liu, Shasha
  • Tan, Weiqiang

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.

Suggested Citation

  • Kong, Dongmin & Lin, Chen & Liu, Shasha & Tan, Weiqiang, 2021. "Whose money is smart? Individual and institutional investors’ trades based on analyst recommendations," Journal of Empirical Finance, Elsevier, vol. 62(C), pages 234-251.
    • Handle: RePEc:eee:empfin:v:62:y:2021:i:c:p:234-251
    DOI: 10.1016/j.jempfin.2021.04.001
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    Cited by:

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    2. Jin, Guangzhu & Huang, Zhenhui, 2023. "On the corporate governance effect of social security funds," Finance Research Letters, Elsevier, vol. 58(PA).
    3. Xu, Bu & Xu, Quanyi & Liu, Xinxin & Qin, Qirui, 2024. "Investor traps: Funds launched during booms," Finance Research Letters, Elsevier, vol. 61(C).
    4. Xiaohong Shen & Gaoshan Wang & Yue Wang & Alfred Peris, 2021. "The Influence of Research Reports on Stock Returns: The Mediating Effect of Machine-Learning-Based Investor Sentiment," Discrete Dynamics in Nature and Society, Hindawi, vol. 2021, pages 1-14, December.
    5. Zhang, Yuan-Yuan & Zhang, Yue-Jun, 2022. "The impact of institutional analyst forecast divergence on crude oil market: Evidence from the mixed frequency models," International Review of Financial Analysis, Elsevier, vol. 84(C).
    6. Ma, Guangyuan & Wang, Yihong & Xu, Yekun & Zhang, Limin, 2023. "The breadth of ownership and corporate earnings management," Finance Research Letters, Elsevier, vol. 52(C).
    7. Linying Lv, 2024. "The Value of Information from Sell-side Analysts," Papers 2411.13813, arXiv.org, revised Dec 2024.
    8. Xiong, Tao & Wang, Peng, 2023. "Institutional ownership and momentum in the Chinese A-share market," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    Analyst recommendation; Individual/institutional investors; Buy-side pressure;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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