An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Gus De Franco
University of Toronto

Hai Lu
University of Toronto

Florin P. Vasvari
University of Toronto

Abstract: This study uses a sample of 50 firm events identified in The Global Research Analysts Settlement in which analysts were ex-post discovered to have acted deceitfully. The setting closely resembles an economically predicted outcome that analysts act strategically. We document that the quarterly institutional holdings of these firms decline significantly over the event period in which the analysts acted deceitfully. This finding is further supported by additional analysis. During the event period, daily trades initiated by institutional investors are dominated by sell orders while the opposite holds true for trades initiated by individual investors. Short interest also increased. We calculate the trading losses by active traders and show that individuals lost 2½ times the amount lost by institutions. The results suggest a wealth transfer from individual investors to institutional investors when analysts act strategically.

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