A Simultaneous Equations Analysis of Analysts’ Forecast Bias, Analyst Following, and Institutional Ownership
In this paper we use a simultaneous equations model to examine the relationship between analysts’ forecasts, analyst following, and institutions’ investment decisions. Estimates of our three equation model using US data indicate that higher institutional demand leads to greater optimism among analysts and lower analyst following. At the same time, institutional demand increases with increasing optimism in analysts’ forecasts but decreases with analyst following. We also investigate firm characteristics as determinants of analysts’ and institutions’ decisions. Empirical estimates of the effects of these characteristics indicate that agency-driven behavioral considerations are significant.