A Simultaneous Equations Analysis of Analysts' Forecast Bias and Institutional Ownership

Lucy F. Ackert and George Athanassakos
Federal Reserve Bank of Atlanta
Working Paper 2000-5
March 2000

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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. We conclude that agency-driven behavioral considerations are significant.

JEL classification: G10, G20

Key words: financial analysts, institutional ownership, earnings forecasts

The authors thank the Social Sciences and Humanities Research Council of Canada for financial support and Bryan Church and workshop participants at Wilfrid Laurier University for helpful comments. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Lucy F. Ackert, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W., Atlanta, Georgia 30303-2713, 404/498-8783, lucy.ackert@atl.frb.org, or George Athanassakos, The Mutual Group Financial Services Research Centre, School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario, Canada N2L 3C5, 519/884-0710 x2561, gathanas@wlu.ca.