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Institutional underperformance: Should managers listen to the sell-side before trading?

Author

Listed:
  • Jeffrey Hobbs

    (Appalachian State University)

  • Vivek Singh

    (University of Michigan, Dearborn)

  • Madhumita Chakraborty

    (Indian Institute of Management, Lucknow)

Abstract

This study examines the performance of institutional trades in the context of recent analyst recommendation changes. We report several findings. First, institutional trades depend little on sell-side activity; they go against recent recommendation changes about as often as with them. Second, abnormal returns to institutional trading are negative, a finding consistent with the previous literature. Third, returns are most harmful when trades go against recent analyst recommendation changes. Fourth, institutional investment returns are still negative, but much less so, for trades that occur in quarters following no change in the consensus recommendation, yet are significantly positive for trades in accordance with previous recommendation changes. The difference in return between trades that agree with and trades that disagree with previous recommendation changes is 4–5.5% in the next quarter. Our results strongly suggest that institutional managers could increase their returns by merely following sell-side analysts' advice more often.

Suggested Citation

  • Jeffrey Hobbs & Vivek Singh & Madhumita Chakraborty, 2021. "Institutional underperformance: Should managers listen to the sell-side before trading?," Review of Quantitative Finance and Accounting, Springer, vol. 57(1), pages 389-410, July.
    • Handle: RePEc:kap:rqfnac:v:57:y:2021:i:1:d:10.1007_s11156-020-00948-z
    DOI: 10.1007/s11156-020-00948-z
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    2. Jiao, Yawen, 2022. "Decision-based trades: An analysis of institutional investors’ information advantages," Journal of Empirical Finance, Elsevier, vol. 68(C), pages 104-115.

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    More about this item

    Keywords

    Buy-side trading; Institutional investors; Market efficiency; Analyst recommendations;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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