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

This study identifies a new source of conflicts of interest in analyst research, originating from the ownership composition of a stock. It documents 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 such as hedge funds. Analysts bias target prices, but not earnings estimates, because this strategy reduces the likelihood the market will recognise their behaviour. Correspondingly, we find that the market fails to see through analyst incentives and reacts favourably 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. They also reward brokers engaging in catering with higher future trades channeled through the broker.

This study adds important new evidence to the literature that examines properties of analyst forecasts. The research paper is available for download at the link below.