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paper presentation

    Natalia Maksimovna Mintchik
    Institutional investor preferences for analyst forecast...
    paper presentation posted July 29, 2010 by Natalia Maksimovna Mintchik 
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    title:
    Institutional investor preferences for analyst forecast accuracy: does investment strategy matter?
    author or authors:
    Natalia Mintchik, University of Missouri-St. Louis; Pamela Stuerke, University of Missouri-St. Louis; Gaiyan Zhang, University of Missouri-St. Louis and Ashley Wang, University of California-Irvine
    moderator:
    N/A
    discussant:
    N/A
    presentation session:
    Research Interactive Session IV
    date:
    August 3, 2010 6:00pm - 7:30pm
    abstract:

    In this study, we examine the association between analyst earnings forecast error and a refined measure of institutional ownership for different groups of institutional investors: transient, dedicated, and quasi-indexers. We hypothesize that transient investors will have higher investment in companies with more accurate earnings forecasts (lower forecast error) because they perceive forecast accuracy as the signal of decreased price impact of trades and increased profit trading opportunities. We also have speculated that dedicated investors will have lower investment in companies with more accurate earnings forecasts (lower forecast error) because of their concerns about lost information advantage and potential overpricing. We have assumed that the accuracy of earnings forecasts is not relevant for the investment decisions of quasi-indexers. Therefore, we haven’t expected to find any association between analyst earnings forecast error and extent of ownership by quasi-indexers in those companies. 

    Empirical evidence suggests that transient investors are indeed drawn to companies with lower forecast errors and increase (decrease) their holdings when the forecast error decreases (increases). However, the evidence on the behavior of dedicated investors and quasi-indexers reveals more complex decision pattern. Overall, controlling for endogeneity, forecast error does not impact levels of ownership by quasi-indexers or dedicated investors. At the same time, our changes analyses suggest that quasi-indexers decrease their holdings in response to forecast error declines while dedicated investors increase their holdings in response to forecast error increases. We also document differences in preferences of different types of institutional investors toward other basic corporate characteristics such as company size, leverage, and stock turnover.

    These findings should be of relevance for financial analysts and for researchers examining earnings management/earnings forecast accuracy. They highlight the importance to adjust for investors’ heterogeneity in research models rather than to cast institutional investors as a homogeneous group. Our findings indicate that, whether they are aware of it or not, in their attempts to achieve “predictable earnings” both management and analysts appeal mainly to one type of institutional investors: transient.

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