Sell-Side Analysts and Stock Mispricing: Evidence from Mutual Fund Flow-Driven Trading Pressure
Management Science · 2019 · Volume 65 · Issue 11
Abstract
Using the setting of extreme mutual fund flow-driven trading pressure, this paper examines sell-side analysts’ role in stabilizing capital markets. We find that a select group of analysts persistently issue price-correcting recommendation changes for stocks experiencing mutual fund flow-driven mispricing. Such recommendation changes are accompanied by little change to their concurrent earnings forecasts and appear to be driven by the superior research skill of these “mispricing-sensitive” analysts. Stocks receiving price-correcting recommendation changes experience less severe liquidity deterioration, more immediate price correction, and consequently smaller subsequent long-run return reversal. Our findings highlight analysts’ unique role in facilitating liquidity provision and stabilizing capital markets during severe mispricing events. This paper was accepted by Neng Wang, finance.
Keywords
stock mispricing, mutual fund trading pressure, analyst research
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