Institutional Investors Investment Horizon and Analysts Target Price Accuracy

Abstract

This paper investigates whether the investment horizon of institutional investors influences sell-side analysts target price (TP) accuracy. Especially, I examine whether a sell-side analyst compromises TP accuracy on a stock if the stock is held by short-term institutional investors since those investors are sensitive to near-term price impact from TP issuances and, therefore, are more likely to exert pressures on analysts to keep the stock price high. Using a database of analysts TPs issued from 1999 to 2013, I find that TP error increases as transient institutional investors ownership increases, but not with the holdings of long-term institutional investors. The market partly appreciates the optimistic biases in the analysts TP revisions, reacting less favorably to a revision if the revision is preceded by the purchase of short-term institutional investors. However, the market overreacts in general and corrects itself in subsequent months. Overall, empirical results indicate that sell-side analysts and the market identify the heterogeneity of institutional investors and react selectively according to institutional investors investment horizons.