HEDGE FUNDS AND SELL-SIDE RESEARCH: THE EFFECT OF HEDGE FUNDS’ STOCK POSITIONS ON ANALYSTS’ RECOMMENDATIONS
Open Access
- Author:
- Chung, Sung Gon
- Graduate Program:
- Business Administration
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- May 26, 2009
- Committee Members:
- Orie Edwin Barron, Dissertation Advisor/Co-Advisor
Orie Edwin Barron, Committee Chair/Co-Chair
Bin Ke, Committee Member
Henock Louis, Committee Member
Laura B Field, Committee Member - Keywords:
- hedge funds
sell-side research analysts - Abstract:
- This study examines whether sell-side research analysts help hedge fund managers by maintaining optimistic (or pessimistic) recommendations when hedge fund managers have large long (or short) positions and by delaying their recommendation revisions when hedge fund managers are unwinding their positions. The SEC and the financial press have raised concerns about pressure on analysts from institutional clients to express views in line with clients’ positions in their recommendations. Of analysts’ institutional clients, hedge fund managers are the most important to analysts because of the large commissions hedge funds generate. If these lucrative clients pressure analysts, I expect that it would be difficult for analysts to remain independent. My results reveal that, after controlling for future earnings surprises, analysts’ recommendations are likely either Buy or Strong Buy when hedge funds have large long positions. I also find that those optimistic recommendations for stocks in which hedge funds have large long positions have negative future returns, indicating that those optimistic recommendations are overly optimistic. I argue that the recommendations for stocks in which hedge funds have large long positions lead to negative returns because analysts do not downgrade their recommendations in a timely manner when their profitable clients sell these stocks. Consistent with this argument, further analysis shows that hedge fund managers start selling their stocks when analysts’ recommendations are optimistic and that analysts downgrade their recommendations after hedge fund managers sell stocks. Cross-sectional analysis uncovers that compared to other analysts, analysts at top ten prime brokers such as Goldman Sachs, Bear Sterns, and Lehman Brothers are almost 40% more likely to downgrade their recommendations in the quarters following stock sales by the 100 largest hedge funds.