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

• Published in: Pacific-Basin finance journal 2021-02, Vol.65, p.101492, Article 101492
• Main Authors: Hsieh, Wen-liang Gideon, Lee, Chin-Shen
• Format: Article
• Language: English
• Subjects: Earnings forecasts; Information reaction; Securities analysts; Stock recommendations; Taiwan; Target prices; Trade imbalance
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2020.101492

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. •Foreign institutions and domestic funds actively respond to analysts' information.•Individual investors provide liquidity during the release of analyst reports.•Informed agents trade based on recommendations and target prices but not earnings forecasts.•Investors react more intensely to a recommendation if it is the only strong signal in the report.•Stronger target signals do not elicit disproportionally larger investor reactions.•The relative trading intensity between foreign institutions and mutual funds predict next-period stock returns.