Open Access Journal Article

Informed Trading of Sell-Side Analysts: Evidence from Class Action Lawsuits

by Hyoseok David Hwang a,* orcid
a
Department of Accounting and Finance, University of Wisconsin - Eau Claire, USA
*
Author to whom correspondence should be addressed.
JEA  2024, 67; 3(3), 67; https://doi.org/10.58567/jea03030005
Received: 18 August 2023 / Accepted: 2 September 2023 / Published Online: 15 September 2024
View Full-Text
Download PDF

Abstract

This paper examines whether sell-side analyst-affiliated investors trade stocks before their analysts release material information. Using class action lawsuits, I explore the pre-lawsuit periods and investigate how potentially informed analysts trade their covered firms. The event study finds that analyst-affiliated investors reduce their stockholdings of firms prior to their own analyst downgrades. The findings are more pronounced among investors employed by investment banks. The post-trading performance of analyst-affiliated investors suggests that they have superior information and front-run to maximize benefits.

Keywords: Sell-side analyst; front running; securities class action lawsuits;
Copyright: © 2024 by Hwang. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

Share and Cite

ACS Style
Hwang, H. D. Informed Trading of Sell-Side Analysts: Evidence from Class Action Lawsuits. Journal of Economic Analysis, 2024, 3, 67. https://doi.org/10.58567/jea03030005
AMA Style
Hwang H D. Informed Trading of Sell-Side Analysts: Evidence from Class Action Lawsuits. Journal of Economic Analysis; 2024, 3(3):67. https://doi.org/10.58567/jea03030005
Chicago/Turabian Style
Hwang, Hyoseok D. 2024. "Informed Trading of Sell-Side Analysts: Evidence from Class Action Lawsuits" Journal of Economic Analysis 3, no.3:67. https://doi.org/10.58567/jea03030005
APA style
Hwang, H. D. (2024). Informed Trading of Sell-Side Analysts: Evidence from Class Action Lawsuits. Journal of Economic Analysis, 3(3), 67. https://doi.org/10.58567/jea03030005

Article Metrics

Article Access Statistics

References

  1. Aggarwal, R. (2000). Stabilization Activities by Underwriters after Initial Public Offerings. Journal of Finance 55, 1075-1103. https://doi.org/10.1111/0022-1082.00241
  2. Brockman, P., Chung, D. Y., and Yan, X. (2009). Block Ownership, Trading Activity, and Market Liquidity. Journal of Financial and Quantitative Analysis 44, 1403-1426. https://www.jstor.org/stable/40505952
  3. Carhart, M. (1997). On Persistence in Mutual Fund Performance. Journal of Finance 52, 57-82. https://doi.org/10.1111/j.1540-6261.1997.tb03808.x
  4. Chan, K. W., Chang, C., and Wang, A. (2009). Put Your Money Where Your Mouth Is: Do Financial Firms Follow Their Own Recommendations? Quarterly Review of Economics and Finance 49, 1095-1112. https://doi.org/10.1016/j.qref.2009.02.002
  5. Chemmanur, T. J., and Fulghieri, P. (1994). Investment Bank Reputation, Information Production, and Financial Intermediation. Journal of Finance 49, 57-79. https://doi.org/10.1111/j.1540-6261.1994.tb04420.x
  6. Christophe, S. E., Ferri, M. G., and Hsieh, J. (2010). Informed Trading before Analyst Downgrades: Evidence from Short Sellers. Journal of Financial Economics 95, 85-106. https://doi.org/10.1016/j.jfineco.2009.02.004
  7. Haushalter, D., & Lowry, M. 2011. When do banks listen to their analysts? Evidence from mergers and acquisitions. Review of Financial Studies, 24, 321-357. https://www.jstor.org/stable/40985851
  8. Heidle, H., and Li, X. (2005). Information Leakage and Opportunistic Behavior before Analyst Recommendations: An Analysis of the Quoting Behavior of NASDAQ Market Makers. Unpublished working paper. https://www.fbv.kit.edu/symposium/10th/papers/Heidle_Li%20-%20Information%20leakage%20and%20opportunistic%20behavior%20before%20analyst%20recommendations%20An%20analysis%20of%20the%20quoting%20behavior%20of%20Nasdaq%20market%20makers.pdf
  9. Hwang, H. (2019). Informed Trading of Mutual Funds: Evidence from Fund-Underwriter Relationships. Financial Management 48(1), 311-338. https://doi.org/10.1111/fima.12230
  10. Hwang, H. (2021). Changes in Trading Behavior of Analyst-Affiliated Institutions: The Impact of The Global Analyst Research Settlement. Financial Markets, Inst & Inst 30(3), 65-83. https://doi.org/10.1111/fmii.12142
  11. Irvine, P. J. (2004). Analysts’ Forecasts and Brokerage-Firm Trading. Accounting Review 79, 125-149. https://www.jstor.org/stable/3203315
  12. Irvine, P., Lipson, M., and Puckett, A. (2007). Tipping. Review of Financial Studies 20, 741-768. https://doi.org/10.1093/rfs/hhl027
  13. Jacob, J., Rock, S., and Weber, D. P. (2008. Do Non-Investment Bank Analysts Make Better Earnings Forecasts? Journal of Accounting, Auditing, and Finance 23, 23-61. https://doi.org/10.1177/0148558X0802300104
  14. Jordan, B. D., Liu, M. H., and Wu, Q. (2012). Do Investment Banks Listen to Their Own Analysts? Journal of Banking & Finance 36, 1452-1463. https://doi.org/10.1016/j.jbankfin.2011.12.010
  15. Juergens, J. L., and Lindsey, L. (2009). Getting Out Early: An Analysis of Market Making Activity at the Recommending Analyst’s Firm. Journal of Finance 64, 2327-2359. https://doi.org/10.1111/j.1540-6261.2009.01502.x
  16. Ljungqvist, A., Marston, F., Starks, L. T., Wei, K. D., and Yan, H. (2007). Conflicts of Interest in Sell-Side Research and the Moderating Role of Institutional Investors. Journal of Financial Economics 85, 420-456. https://doi.org/10.1016/j.jfineco.2005.12.004
  17. Mao, C. X., and Song, W.-L. (2012). Does Syndicate Relationship Affect Analysts’ Incentive to Produce Information? Evidence from Recommended Firms’ Securities Class Action Lawsuits. Unpublished working paper. https://dx.doi.org/10.2139/ssrn.2027209
  18. Massa, M., and Rehman, Z. (2008). Information Flows within Financial Conglomerates: Evidence from the Banks-Mutual Funds Relation. Journal of Financial Economics 89, 288-306. https://doi.org/10.1016/j.jfineco.2007.10.002
  19. Mehran, H., and Stulz, R. M. (2007). The Economics of Conflicts of Interest in Financial Institutions. Journal of Financial Economics 85, 267-296. https://doi.org/10.1016/j.jfineco.2006.11.001
  20. Michaely, R., and Womack, K. L. (1999). Conflict of Interest and the Credibility of Underwriter Analyst Recommendations. Review of Financial Studies 12, 653-686. https://www.jstor.org/stable/2645961
  21. Park, T.-J., Lee, Y., and Song, K. (2014). Informed Trading before Positive vs. Negative Earnings Surprises. Journal of Banking & Finance 49, 228-241. https://doi.org/10.1016/j.jbankfin.2014.09.016
  22. Schultz, P. H., and Zaman, M. A. (1994). Aftermarket Support and Underpricing of Initial Public Offerings, Journal of Financial Economics 35, 199-219. https://doi.org/10.1016/0304-405X(94)90004-3