A Simultaneous Equations Analysis of Analysts’ Forecast Bias and Institutional Ownership
Journal of Business Finance and Accounting
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In this paper we use a simultaneous equations model to examine the relationship between analysts’ forecasting decisions and institutions’ investment decisions. Neglecting their interaction results in model misspecification. We find that analysts’ optimism concerning a firm’s earnings responds positively to changes in the number of institutions holding the firm’s stock. At the same time, institutional demand responds positively to increases in analysts’ optimism. We also investigate several firm characteristics as determinants of analysts’ and institutions’ decisions. Empirical estimates of the effects of these characteristics indicate that agency-driven behavioral considerations are significant.