Institutional Investors, Commission Fees, and Analyst Bias

Abstract

Anecdotal evidence suggests that institutional investors pressure financial analysts through trading commissions to issue biased opinions in support of their stock positions. We use a unique dataset that identifies mutual fund companies' allocation of commission fees to individual brokers and provide direct evidence in this regard. In particular, we show that analysts are more optimistically biased in their stock recommendations and earnings forecasts for stocks that the mutual funds have taken large positions in when the analysts' brokers receive commission fees from the fund management companies. The relationship is stronger when the commission fee pressure is greater. The market reacts less favorably to strong buy recommendations of analysts facing greater commission fee pressure. The funds also respond negatively to such recommendations in making portfolio adjustments.