The Impact of Security Analyst Recommendations Upon the Trading of Mutual Funds

David J. Costello, Jason L. Hall
2011 Social Science Research Network  
There exists a substantial divide between the empirical and survey evidence regarding the influence of sell-side analyst recommendations on the trading of mutual funds. While surveys of fund managers suggest that they assign little weight to analyst recommendations, the empirical evidence suggests their trading is heavily influenced by analyst recommendations. Nonetheless, the existing empirical evidence does not readily yield robust inferences as to the direction of causality in the relation
more » ... y in the relation between the trading of mutual funds and analyst recommendations. Our study thus meets the pressing need to undertake a large-sample empirical study to understand the behaviour of these important capital market participants. Employing a robust research design and using a sample many times larger than those used in prior studies, we document a positive association between quarterly changes in mutual fund holdings and analyst recommendations at the consensus and individual analyst level. Our results thus contradict the survey evidence and suggest that the trading of mutual funds is influenced by the recommendations of sell-side analysts. Moreover, we find that analysts included in the Institutional Investor All-American Research Team exert significantly more influence on the trading of mutual funds than their less heralded peers.
doi:10.2139/ssrn.1645009 fatcat:a6ohlbux7bhiznycbdv623b3lq