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Who reacts to what information in securities analyst reports? Direct evidence from the investor trade imbalance

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  • Hsieh, Wen-liang Gideon
  • Lee, Chin-Shen

Abstract

Using a comprehensive dataset that distinguishes the buy/sell volume of four investor types, we find that foreign institutions and domestic mutual funds are the primary users of analyst reports. Their buy–sell imbalances move in tandem with analysts' signals and significantly explain the size of cumulative abnormal returns across incidents of analyst report releases. Proprietary traders' buy/sell positions are less related to analyst opinions, and individual investors emerge as de facto liquidity providers to aggressive institutions. Institutional investors respond first to stock recommendations and then use target prices as supplementary information. Earnings forecasts, which contain nuanced information, do not elicit abnormal trade imbalances for any institutional investors. We further discover that trade reactions to target prices and earnings forecasts can be viewed more as a constant multiplier of the signal rather than as an increasing or decreasing function of the signal strength. The trade imbalance caused by analyst information is found to predict next-period stock returns, although the predictive ability is for the short-term period only.

Suggested Citation

  • Hsieh, Wen-liang Gideon & Lee, Chin-Shen, 2021. "Who reacts to what information in securities analyst reports? Direct evidence from the investor trade imbalance," Pacific-Basin Finance Journal, Elsevier, vol. 65(C).
    • Handle: RePEc:eee:pacfin:v:65:y:2021:i:c:s0927538x20307046
    DOI: 10.1016/j.pacfin.2020.101492
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    References listed on IDEAS

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    2. Huai-Chun Lo & Chia-Ying Chan, 2023. "Mean reverting in stock ratings distribution," Review of Quantitative Finance and Accounting, Springer, vol. 60(3), pages 1065-1097, April.

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    More about this item

    Keywords

    Securities analysts; Trade imbalance; Information reaction; Stock recommendations; Target prices; Earnings forecasts; Taiwan;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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