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

Author

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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)

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.

Suggested Citation

  • Johan Sulaeman & Kelsey D. Wei, 2019. "Sell-Side Analysts and Stock Mispricing: Evidence from Mutual Fund Flow-Driven Trading Pressure," Management Science, INFORMS, vol. 65(11), pages 5427-5448, November.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:11:p:5427-5448
    DOI: 10.1287/mnsc.2018.3073
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    References listed on IDEAS

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    Cited by:

    1. Li, Wencong & Yang, Xingquan & Yin, Xingqiang, 2022. "Non-state shareholders entering of state-owned enterprises and equity mispricing: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 84(C).
    2. Steven Chong Xiao, 2020. "Do Noisy Stock Prices Impede Real Efficiency?," Management Science, INFORMS, vol. 66(12), pages 5990-6014, December.
    3. Johan Sulaeman, 2019. "Comments on "The role of different institutional investors in Asia-Pacific bond markets during the taper tantrum"," BIS Papers chapters, in: Bank for International Settlements (ed.), Asia-Pacific fixed income markets: evolving structure, participation and pricing, volume 102, pages 143-145, Bank for International Settlements.
    4. Bank for International Settlements, 2019. "Asia-Pacific fixed income markets: evolving structure, participation and pricing," BIS Papers, Bank for International Settlements, number 102.

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