How do institutional investors interact with sell-side analysts?

다국어 초록 (Multilingual Abstract)

This paper examines how institutional investors interact with sell-side analysts in Korean stock market. I focus on the role of institutional investors as sophisticated stock market participants who may analyze sell-side analysts’ information components as earnings forecast in addition to using their outputs as recommendation, target price. Furthermore, I examine whether institutional investors can differentiate between good information and bad information provided by sell-side analysts. By using a sample of 1,421 firm/year observations in Korean stock market from 2001 to 2011, the results indicate that institutional investors may take an active role as a mechanism to incorporate V/P ratios (value to price) derived from earnings forecast information to analyze sell-side analysts’ information components, in addition to using the outputs as recommendation. Moreover, I find that institutional investors are more likely to use sell-side analysts’ information when the earnings forecast is more accurate, meaning that institutional investors can differentiate between good information and bad information. On the other way round, I examine if institutional investors’ trading behavior affects sell-side analysts’ information, and find that sell-side analysts do not use information produced from buy-side investors’ trading behavior. In sum, I can conclude that the main results support the causality relationship that institutional investors trade by looking at the sell-side analysts’ information components as earnings forecast in detail, and by using their information only when the earnings forecast information is more accurate, not the other way round. This study can shed some lights on the knowledge about the unobserved interaction between the most sophisticated stock market participants who are considered to have taken a role to enhance stock market efficiency, and extends the prior literature which factors bring about institutional investors’ sophistication.

목차 (Table of Contents)

• Ⅰ. INTRODUCTION 1
• Ⅱ. BACKGROUND AND HYPOTHESIS DEVELOPMENT 8
• 2.1 Prior Literatures 8
• 2.2 Hypothesis development 12
• Ⅲ. RESEARCH DESIGN AND VARIABLE MEASUREMENT 19
• 3.1 V/P ratio in Earnings-Based Valuation Model 19
• 3.2 Regression Equation 21
• 3.2.1 The association between the institutional investors and sell side analysts forecast information 21
• 3.2.2 The impact of institutional ownership change on a change in sell side analysts information 24
• 3.3 Sample Selection 26
• Ⅳ. MAIN RESULTS 28
• 4.1 Descriptive Statistics and Univariate Analysis 28
• 4.2 Multivariate Analysis 34
• 4.2.1 The association between institutional investors and sell side analysts 34
• 4.2.2 The impact of accuracy of sell side analysts earnings forecast on the interaction between institutional investors and sell side analysts 39
• 4.2.3 The impact of institutional ownership change on a change in sell side analysts information 43
• Ⅴ. SENSITIVITY TEST 46
• 5.1 Full sample (2001-2011) including year 2008 46
• 5.2 EPS/P, VOJ/P, VPEG/P as sell side analysts information 50
• 5.3 Change variables (V/P, TARGET/P and RECOM) instead of level 56
• Ⅵ. CONCLUSION 60
• REFERENCES 62