Put Your Money Where Your Mouth Is: Do Financial Firms Follow Their Own Recommendations?

Abstract

We explore how US-based financial firms trade relative to own-firm, equity, analyst recommendations. We match the quarterly trades of these financial firms with "in-house" recommendations and document their trading patterns before, in the same quarter as, and after issuing recommendations. In general, net trade is more positive around upgrades than downgrades, and these relations are particularly significant in the quarter of and quarter after the analyst recommendation. Our results are robust to different specifications of firm trade, sub-period analysis, size quantiles, and various control variables. We can draw the conclusion that financial firms do generally follow their own analyst recommendations in terms of firm-wide trading relative to recommendations. Contrary to public criticism of financial firms, our results suggest that financial firms actually do "put their money where their mouths are".