Impact of Institutional Coordination on Analyst Decisions During Hedge Fund Activism
Keywords:
business, economics, institutional coordination, analyst recommendations, hedge fund activismAbstract
This study explores the influence of institutional investor coordination on analyst recommendations in the context of hedge fund activism. We find that analysts are more likely to upgrade and less likely to downgrade their recommendations for firms with growing institutional ownership, while institutional coverage primarily influences upgrade predictions. The effect is more pronounced when activists have a track record of acquiring firms with institutional investor backing. Our analysis also shows that during crisis, analysts emphasize collective institutional actions, whereas in normal periods, they focus on ownership levels. These findings suggest that institutional coordination reduces analyst uncertainty and positively shapes their opinions during activist campaigns.
References
Ben-David, I., Franzoni, F., & Moussawi, R. (2012). Hedge fund stock trading in the financial crisis of 2007–2009. The Review of Financial Studies, 25(1), 1–54.
Bradshaw, M.T. (2011). Analysts’ forecasts: What do we know after decades of work? Working paper, Boston College, Boston.
Brav, A., Jiang, W., Partnoy, F., & Thomas, R. (2008). Hedge fund activism, corporate governance, and firm performance. The Journal of Finance, 63(4), 1729–1775.
Briggs, T. (2007). Corporate governance and the new hedge fund activism: An empirical analysis. The Journal of Corporation Law, 32(4), 681–737.
Brunnermeier, M.K., & Pedersen, L.H. (2009). Market liquidity and funding liquidity. The Review of Financial Studies, 22(6), 2201–2238.
Chen, J., & Jung, M.J. (2016). Activist hedge funds and firm disclosure. Review of Financial Economics, 29, 52–63.
Chen, B., Kazemi, M.M., & Yang, X. (2025). Do hedge fund clients of prime brokers front-run their analysts? International Review of Economics & Finance, 97, 103824.
Chen, B., Chen, W., & Yang, X. (2025). Does information asymmetry affect firm disclosure? Evidence from mergers and acquisitions of financial institutions. Journal of Risk and Financial Management, 18(2), 64.
Clifford, C.P. (2008). Value creation or destruction? Hedge funds as shareholder activists. Journal of Corporate Finance, 14(4), 323–336.
Coffee Jr., J.C., & Palia, D. (2016). The wolf at the door: The impact of hedge fund activism on corporate governance. Annals of Corporate Governance, 1(1), 1–94.
Demerjian, P., Lev, B., & McVay, S. (2012). Quantifying managerial ability: A new measure and validity tests. Management Science, 58(7), 1229–1248.
Flugum, R., & Howe, J.S., (2020). Hedge fund activism and analyst uncertainty. International Review of Economics & Finance, 66, 206–227.
Gu, Z., Li, Z., & Yang, Y.G. (2013). Monitors or predators: The influence of institutional investors on sell-side analysts. The Accounting Review, 88(1), 137–169.
Jegadeesh, N., & Kim, W. (2010). Do analysts herd? An analysis of recommendations and market reactions. The Review of Financial Studies, 23(2), 901–937.
Khurana, I.K., Li, Y., & Wang, W. (2018). The effects of hedge fund interventions on strategic firm behavior. Management Science, 64(9), 4094–4117.
Klein, A., & Zur, E. (2009). Entrepreneurial shareholder activism: Hedge funds and other private investors. The Journal of Finance, 64(1), 187–229.
Ljungqvist, A., Marston, F., Starks, L.T., Wei, K.D., & Yan, H. (2007). Conflicts of interest in sell-side research and the moderating role of institutional investors. Journal of Financial Economics, 85(2), 420–456.
Loh, R.K., & Mian, M. (2003). The quality of analysts’ earnings forecasts during the Asian crisis: evidence from Singapore. Journal of Business Finance & Accounting, 30(5–6), 749–770.
Loh, R.K., & Stulz, R.M. (2011). When are analyst recommendation changes influential? The Review of Financial Studies, 24(2), 593–627.
Sidhu, B., & Tan, H.C. (2011). The performance of equity analysts during the global financial crisis. Australian Accounting Review, 21(1), 32–43.
Wong, Y.T.F. (2020). Wolves at the door: A closer look at hedge fund activism. Management Science, 66(6), 2347–2371.
Yan, Y., & Yang, X. (2022). Analyst Recommendations: Evidence on Hedge Fund Activism and Managerial Ability. Review of Pacific Basin Financial Markets and Policies, 25(01), 2250004.
Yang, X., & Chen, W. (2021). The joint effects of macroeconomic uncertainty and cyclicality on management and analyst earnings forecasts. Journal of Economics and Business, 116, 106006.
Yang, X., & Kazemi, H.B. (2020). Holdings concentration and hedge fund investment strategies. The Journal of Alternative Investments, 22(4), 92–106.
Yang, X., Kazemi, B.H., & Sherman, G.M. (2021). Hedge Funds and Prime Brokers: Favorable IPO Allocations. The Journal of Portfolio Management, 47(8), 105–123.
