Working Paper

A simultaneous equations analysis of analysts’ forecast bias and institutional ownership

Abstract: 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.

Keywords: Financial institutions; Forecasting; Financial markets;

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2000

Number: 2000-5