Do Institutional Investors Trade Consistently with Sell-side Analyst Recommendations? Evidence from Corporate Bankruptcies
corporate bankruptcy; institutional investors; securities analysts; institutional investments; commerce; analyst ratings
Quarterly Journal of Finance & Accounting
In this paper we analyze the relationship between the investment behavior of institutional managers who hold and trade shares of firms approaching bankruptcy and analyst recommendation changes for the firms in distress. When evaluating how institutions trade shares of distressed firms as they approach bankruptcy, we find that during the five-year period preceding bankruptcy filings institutional investors (except those managing investment companies) are net buyers with a positive abnormal net number of shares traded during the period as compared to a control sample. Institutional managers trade consistently with recommendations issued by security analysts. However, on average analysts do not materially downgrade their recommendations for the failing firms until only a few months prior to the Chapter 11 bankruptcy filings; consequently, the institutional managers' decisions to divest of shares of the firms may be too-little-too-late.