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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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    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. Bank for International Settlements, 2019. "Asia-Pacific fixed income markets: evolving structure, participation and pricing," BIS Papers, Bank for International Settlements, number 102.
    3. Steven Chong Xiao, 2020. "Do Noisy Stock Prices Impede Real Efficiency?," Management Science, INFORMS, vol. 66(12), pages 5990-6014, December.
    4. 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.

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