Strategic Distortions in Analyst Target Prices in the Presence of Short-Term Institutional Investors

• In Event: Financial Analysts and the Capital Market

Abstract

This study identifies a new source of conflicts of interest in analyst research that originates from the ownership composition of a stock. We document an economically and statistically significant increase in bias in analyst target prices, but not in earnings estimates, in the presence of short-term institutional investors. Analysts bias target prices, but not earnings estimates, because this strategy reduces the likelihood the market will recognize their catering behavior. Correspondingly, we find that the market fails to see through analyst incentives and reacts favorably to target price revisions for stocks with high short-term ownership. Short-term institutional investors take advantage of temporary stock overpricing to offload their holdings to retail traders.

Authors

• Pawel Bilinski, Cass Business School

• Konstantinos Stathopoulos, Manchester Business School

• Martin Walker, Manchester Business School