This study identifies a new source of conflicts of interest in analyst
research, originating from the ownership composition of a stock. It documents
an economically and statistically significant increase in bias in analyst
target prices, but not in earnings estimates, in the presence of short-term
institutional investors such as hedge funds. Analysts bias target prices, but
not earnings estimates, because this strategy reduces the likelihood the market
will recognise their behaviour. Correspondingly, we find that the market fails
to see through analyst incentives and reacts favourably to target price
revisions for stocks with high short-term ownership. Short-term institutional
investors take advantage of temporary stock overpricing to offload their
holdings to retail traders. They also reward brokers engaging in catering with
higher future trades channeled through the broker.
This study adds important new evidence to the literature that examines
properties of analyst forecasts. The research paper is available for download
at the link below.