Hedge funds and their prime broker analysts

• Main Authors: CHUNG, Sung Gon, KULCHANIA, Manoj, TEO, Melvyn
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Hedge funds; Prime brokers; Analysts; Conflicts of interest; Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6678; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7677/viewcontent/Hedge_funds_and_their_prime_broker_analysts_sv.pdf
• Institution: Singapore Management University

Are sell-side analysts reluctant to go against the investment views of their hedge funds when these hedge funds are their prime brokerage clients? We show that prime broker analysts tend to upgrade stocks recently bought by their clients. For stocks with upgraded recommendations, post-announcement cumulative abnormal returns are significantly lower for those purchased by the prime brokerage clients. Our results are stronger with high-dollar-turnover clients who generate more trading commissions. We also find that a hedge fund with a large bet on a stock has a stronger incentive to pressure the fund’s prime brokers to issue a favorable recommendation on the stock. Results are not driven by stocks of firms with low analyst coverage or small size.