Analyst Tipping: Additional Evidence

• Published date: 01 January 2017
• Date: 01 January 2017
• DOI: http://doi.org/10.1111/jbfa.12231
• Author: Stanimir Markov,Musa Subasi,Volkan Muslu

Journal of Business Finance & Accounting

Journal of Business Finance & Accounting, 44(1) & (2), 94–115, January/February 2017, 0306-686X

doi: 10.1111/jbfa.12231

Analyst Tipping: Additional Evidence

Stanimir Markov, Volkan Muslu and Musa Subasi∗

Abstract: We examine whether analysts tip investors during investor conferences. We find

that conference-day abnormal returns of a presenting company are about 0.6% higher when

the conference is hosted by an analyst who will initiate coverage with a Buy recommendation

than when the conference is hosted by non-initiating analysts. Furthermore, conference-day

abnormal returns of the presenting company amount to half of the price run-up during the 20

trading days prior to the Buy initiation. Finally, there is a statistically and economically significant

price run-up prior to a Sell initiation (by about –0.7%) when the analyst who will initiate coverage

with a Sell recommendation hosts a conference but does not invite the company to present.

Our findings collectively suggest that analysts, rather than companies, tip select investors about

upcoming initiations during conferences.

Keywords: investor conferences, equity analysts

“We cannot, of course, observe tipping. We can only present evidence that is consistent with tipping”

(Irvine, Lipson and Puckett, 2007)

1. INTRODUCTION

Do sell-side equity analysts tip select investors about their research that will soon be

distributed to other investors? This question is important because analyst research has

more investment value before it is widely distributed. Brokers’ internal policies and

Financial Industry Regulatory Authority’s (FINRA) regulations have made it increas-

ingly more difficult for analysts to selectively distribute research to investors, because

doing so may violate brokers’ duties “to prevent fraudulent and manipulative acts and

practices, to promote just and equitable principles of trade and, in general, to protect

investors and the public interest”.1Yet, analysts have incentives to selectively distribute

research in order to attract institutional clients and increase trading commission

revenue. Anecdotally, brokers tip clients who bring the most revenue (Taylor, 1995;

∗Stanimir Markov is from the Cox School of Business, Southern Methodist University, Dallas, TX; Volkan

Muslu is from the C.T. Bauer College of Business, University of Houston, TX; and Musa Subasi is from the

Robert H. Smith School of Business, University of Maryland, College Park, MD. The authors thank Suresh

Radhakrishnan, Michael Rebello and seminar participants at the University of Texas at Dallas and the 2012

AAA Annual Meeting. (Paper received December 2014, revised revision accepted December 2016).

Address for correspondence: Musa Subasi, Assistant Professor, University of Maryland Robert H. Smith

School of Business 4332N Van Munching Hall College Park, MD 20742.

email: msubasi@rsmith.umd.edu

1 Section 15A(b)(6) of the Securities Exchange Act of 1934. See section 2(i) for a brief history regarding

regulations on selective distribution of analyst research.

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Smith, 2003; Bray, 2008). Surprisingly, academic studies have not adequately studied

this question due to difficulties in detecting private communications between analysts

and investors.

In their seminal study, Irvine et al. (2007) show elevated institutional trading

and stock price run-up prior to analysts’ coverage initiations with Buy recommen-

dations. Subsequent studies document abnormal stock trading before downgrades

and abnormal option trading before recommendation revisions.2The above evidence

suggests that institutional traders receive tips about analysts’ upcoming Buy initiations

and recommendation revisions, but it does not clarify the mechanism by which

tipping takes place or refute alternative arguments that investor attention or company

managers drive elevated trading volume or price run-ups.

An analysis of analyst-hosted invitation-only investor conferences can shed light on

how analysts tip select investors and refute alternative arguments. These conferences

include formal company presentations and face-to-face private interactions between

host-analysts, institutional investors and company managers in a “well-defined physical

and social setting, or disclosure milieu” (Bushee et al., 2011). Based on these interac-

tions, participating investors can update their beliefs about presenting companies and

trade ahead of other investors. For instance, Bushee et al. (2011) document abnormal

stock returns and trading volume around company presentations at the conferences,

and a considerable cross-sectional variation in abnormal returns and trading volume

based on conference characteristics such as sponsor, location, size and industry focus.

Green et al. (2014a) document improvements in analyst following, stock liquidity

and valuation multiples for companies who present at conferences while Green et al.

(2014b) document more informative recommendations and more accurate and timely

forecasts by host-analysts shortly after conferences.

Overall, the literature documents substantial benefits to all conference participants,

including investors. However, this evidence does not speak to whether host-analysts

provide participating investors with their independent opinion/research that will soon

be distributed to other investors, or whether host-analysts just facilitate information

flow from managers to participating investors. Host-analysts (managers) are the source

of information in the former (latter) explanation for the documented benefits to

participating investors.

In this paper, we test whether analysts are independent sources of information –

beside managers – at conferences. As the primary testing events, we link conferences

to analysts’ initiations of coverage that follow the conferences. Analysts control the

decision, timing and execution of their coverage initiations as well as conferences they

host. If analysts do not choose to selectively distribute their research, then participating

investors cannot know about upcoming initiations. In contrast, analysts may tip partic-

ipating investors about upcoming initiations, given that analysts select participating

companies and investors, and create a setting in which private information can be

easily exchanged. Alternatively, managers may tip investors about upcoming initiations

during the conferences, given that initiating analysts typically contact managers before

the initiations for factual review (Reingold, 2006, pp. 61 and 67).

2 Prior to downgrades, there are both abnormal short selling volume (Christophe et al., 2010), and

abnormal selling volume at the recommending analyst’s broker (Juergens and Lindsey, 2009). Prior to

recommendation revisions, there is abnormal option trading volume in the direction of revisions (Hayunga

and Lung, 2013).

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2016 John Wiley & Sons Ltd