Essay I: Who Get Analyst Textual Opinions Early? Evidence from Institutional Clients’

Trading Responses

We investigate the relation between the trading by institutional clients of brokerage firms and the textual content of analyst reports released from the brokerage firms. Our investigation reveals several key insights: First, institutional investors’ trades respond to analyst textual opinions but those of individual investors do not. Second, institutions’ trading activities are consistent with the analyst textual opinions up to four days before the release of reports, suggesting early knowledge of such information. Third, top clients, defined as those who make the largest contributions to a brokerage firm’s commission revenues, trade earlier and more intensively on the textual...[ Read more ]

Essay I: Who Get Analyst Textual Opinions Early? Evidence from Institutional Clients’

Trading Responses

We investigate the relation between the trading by institutional clients of brokerage firms and the textual content of analyst reports released from the brokerage firms. Our investigation reveals several key insights: First, institutional investors’ trades respond to analyst textual opinions but those of individual investors do not. Second, institutions’ trading activities are consistent with the analyst textual opinions up to four days before the release of reports, suggesting early knowledge of such information. Third, top clients, defined as those who make the largest contributions to a brokerage firm’s commission revenues, trade earlier and more intensively on the textual content of analyst reports released from the brokerage firm, than other institutions. Fourth, institutional trades, particularly those of top clients, respond to negative opinions contained in the reports earlier and more intensively than their reaction to positive opinions contained in the reports. Lastly, institution investors who trade on analyst textual opinions before the release of reports earn significant profits after commission fees. Collectively, we find evidence that analysts provide select clients a valuable privileged service by informing the textual content of forthcoming reports.

Essay II: Hardening Soft Information: Analyst Conservative Bias

In this study, we examine how a sell-side analyst translates her soft information into a hard format. Sell-side analysts produce both soft research output, in the form of a textual report, and hard research output, including earnings forecasts, target prices, and stock recommendations. We find evidence that analyst’s hard outputs undershoot the neutral implication of her own soft output, regardless of the direction. Furthermore, our cross-sectional results show that the observed conservative bias increases when the underlying information signals are of poorer quality, which we measure by the forecast horizon, linguistic cues in the report, and characteristics of the firms’ information environments. Consistent with that bad news contains more noises and triggers greater market attention, we find that hard outputs assimilate analyst’s soft output more conservatively when her soft output conveys bad news. Our findings suggest that the fundamental distinctions between soft and hard information lead to a predicable bias when an analyst hardens her soft information.