Analysts' Forecasts and Institutional Investors' Behavior

Numerous studies have shown that investment banking affiliations generate pressure on analysts to produce optimistic recommendations regarding affiliated stocks. By using a sample of listed companies in Taiwan, this study examined the stock trading of dealer departments, the portfolios of which contained stocks rated by an affiliated analyst. Controlling for various factors, including the dealer affiliation, we conducted a comparison to determine whether the trading behavior for a stock by an affiliated dealer department led to more optimistic analyst forecasts when paralleled to the consensus. If systematic evidence exists regarding dealer trading on the information of analysts' stock price forecasts, information processing is central to the role of the dealer. Therefore, the leakage of confidential information received by traded stocks could result in critical costs. Creating information asymmetry among investors could adversely affect the liquidity of public markets.