Sell-Side Analysts and Stock Mispricing: Evidence from Mutual Fund Flow-Driven Trading Pressure

Johan Sulaeman () and Kelsey D. Wei ()
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Johan Sulaeman: NUS Business School, National University of Singapore, Singapore 119245
Kelsey D. Wei: Jindal School of Management, University of Texas at Dallas, Richardson, Texas 75080

Management Science, 2019, vol. 65, issue 11, 5427-5448

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.

Keywords: stock mispricing; mutual fund trading pressure; analyst research (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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