“Sell-Side Analysts’ Responses to Mutual Fund Trading Pressure” by Kelsey Wei
University of Texas Dallas
Southern Methodist University
This paper illustrates the unique role of sell-side analysts in improving market efficiency by examining their responses to mutual fund flow-driven mispricing. We find that a select group of analysts persistently issue price-correcting recommendation changes for stocks subject to flowdriven mispricing while making little change to their concurrent earnings forecasts for the underlying firms, suggesting that the recommendation changes are driven by stock mispricing rather than cash flow-related information. Furthermore, fire-sale stocks upgraded or firepurchase stocks downgraded by analysts experience greater liquidity recovery and price correction immediately following analyst revisions. Correspondingly, they exhibit smaller return reversals in the long run. This role of analysts in speeding up price correction is more pronounced for stocks with lower institutional ownership or greater valuation uncertainty. Our findings suggest that mispricing-sensitive analysts play an important role in facilitating liquidity provision and stabilizing the financial market.