Research Shows Sell-Side Analysts Time Their Recommendations Around Mutual Funds

The pattern benefits active managers — but comes at a cost for the analysts.


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Some sell-side analysts are more likely to rate stocks highly just before the quarter closes, new research shows.

The timing helps their clients, specifically actively managed mutual funds, end the quarter on a high note performance-wise — but it appears to come with a reputational cost for the analysts.

Researchers Anna Agapova and Uliana Filatova at Florida Atlantic University recently published a paper that documents this pattern of analyst recommendations. They found that in the last month of a quarter, ratings tend to jump. The following month — the first in a quarter — those same ratings decline.

“This study captures the tradeoff between analysts catering to institutional clients and their reputations by examining whether analysts strategically time their biased optimistic recommendations,” according to the paper.

Agapova and Filatova analyzed data on individual analysts at U.S. firms using the I/B/E/S Academic, Thompson Refinitiv, Compustat, and CRSP databases. The data studied spanned from January 2002 to December 2017. The researchers only looked at active institutional holdings, excluding index funds, ETFs, and ETNs.


On average, analyst recommendations were optimistic — with stocks rated as a “strong buy” or “buy” — 46.12 percent of the time. Conversely, analysts assigned “underperform” or “sell” recommendations only 9.11 percent of the time, the researchers showed. This is in line with existing research on analyst optimism.

In the last month of a quarter, the likelihood of a stock receiving a “buy” or “strong buy” recommendation grew in tandem with the size of its active mutual fund ownership. For every additional percentage point in a stock’s holdings managed by mutual funds, the probability of the stock receiving a buy or strong buy recommendation was 3.87 percent higher.

Meanwhile, the probability of a stock receiving a negative recommendation fell by 1.32 percent for every additional percent of active ownership by mutual funds.

Stocks were also more likely to be upgraded — for example, from “buy” to “strong buy” — during the last month of a quarter.

But in the first month of a quarter, that effect was flipped. The probability of a stock receiving a positive recommendation was lower by 5.69 percent, while the probability of receiving a negative recommendation was higher by 1.94 percent.

The timing behavior did not appear to engender goodwill among institutional investors — at least not in the form of industry accolades. Although the researchers were able to track the upgrades and downgrades in the general population of analysts, this pattern was not present among the list of analysts who have been ranked on Institutional Investor’s All-America Research Team.

Although these analysts are more likely to upgrade or downgrade an investment in any given month, these recommendations do not follow any sort of traceable pattern, the researchers showed.

“To star analysts, the benefit of catering to mutual fund managers with the timing of favorable recommendations around the mutual fund reporting period is lower than the cost of losing analysts’ reputation capital,” the paper said.