How do institutional investors interact with sell-side analysts?

Grace Il Joo Kang, Yong Keun Yoo, Seung Min Cha

    Research output: Contribution to journalArticlepeer-review

    3 Citations (Scopus)

    Abstract

    This paper examines how institutional investors interact with sell-side analysts (hereafter, SSAs) in Korean stock market. In particular, we examine the role of institutional investors as a more sophisticated mechanism which incorporates sell-side analysts’ stock recommendation, target price, and earnings forecast more rapidly than individual investors do. Moreover, we examine whether institutional investors differentiate the quality of sell-side analysts’ information. By using a sample of 1,421 firm-year observations in Korean stock market during 2001–2011, we find that the change of institutional investor’s ownership has a significantly positive association with the level of equity value estimates based on SSAs’ earnings forecasts relative to stock prices and their stock recommendation which are considered as SSAs’ indicator of stock market’s mispricing. In addition, we find that only when SSAs provide more accurate earnings forecasts, institutional investors incorporate SSA’s information into their stock trading. Thus, we conclude that institutional investors in Korean stock market contribute to the enhancement of stock market efficiency by incorporating SSAs’ information into their stock trading more rapidly than individual investors. Our findings add to the literature by shedding a light on the unobserved interaction among more sophisticated stock market participants, such as institutional investors and sell-side analysts.

    Original languageEnglish
    Pages (from-to)455-470
    Number of pages16
    JournalJournal of Applied Business Research
    Volume34
    Issue number3
    DOIs
    Publication statusPublished - 2018 May 1

    Bibliographical note

    Publisher Copyright:
    © 2018, CIBER Institute. All rights reserved.

    Keywords

    • Analysts’ earnings forecasts
    • Institutional ownership
    • Sell-side analyst
    • Stock recommendations
    • Target prices

    ASJC Scopus subject areas

    • Business and International Management

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