Buy-Side Analysts, Sell-Side Analysts, and Investment Decisions of Money Managers
Posted: 13 Mar 2006
We examine the role of financial analysts in forming institutional investors' investment decisions. In our model, a fund manager invests in a stock based on the optimal weighting of reports created by a biased sell-side analyst and an unbiased buy-side analyst. The manager puts a higher weight on the buy-side analyst's report when the quality of the buy-side analyst's information relative to that of the sell-side analyst increases, or when the sell-side analyst's degree of bias or uncertainty about the bias increases. Utilizing a unique data set of U.S. equity funds, we find evidence supporting our model predictions on how fund managers weigh buy-side research relative to sell-side and independent research.
Keywords: Buy-side analyst, sell-side analyst, bias, earnings forecast, excess return
JEL Classification: G29, G23, G24, D82, G10
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