Buy-side trades and sell-side recommendations: Interactions and information content

• Published in: Journal of financial markets (Amsterdam, Netherlands) Netherlands), 2012-05, Vol.15 (2), p.207-232
• Main Authors: Busse, Jeffrey A., Clifton Green, T., Jegadeesh, Narasimhan
• Format: Article
• Language: English
• Subjects: Analyst recommendations; Institutional trading
• ISSN: 1386-4181; 1878-576X
• DOI: 10.1016/j.finmar.2011.08.001

We examine the performance of buy-side institutional investor trades and sell-side brokerage analyst stock recommendations, as well as their interactions. Buy-side trades follow sell-side analyst recommendations but not the other way around. While buy-side purchases significantly outperform their sales, the difference in performance is largely concentrated on the day of the transaction. Following recommendation changes, buy-side trades in the same direction as the recommendation change earn the same returns as trades in the opposite direction. Therefore, institutional investors do not exhibit special skills in discerning the quality of recommendations. ► We examine the performance of institutional trades and analyst stock recommendations as well as their interactions. ► Institutional trades follow analyst recommendation changes but not vice versa. ► Institutional purchases outperform their sales, but only on the day of the transaction. ► Institutional trades in the same direction as recommendation changes do not outperform trades in the opposite direction. ► Institutional investors do not exhibit skills to discern the quality of analysts' recommendations.