Ownership Structure and Analysts' Forecasts

In this paper, we develop a model of earnings management that sheds light onto empirical regularities in the behavior of institutions and insiders. We link the earnings management decision to insiders' stake and show how this may impact analysts' forecast accuracy and institutional trading. More precisely, whenever there is excessive earnings management we observe less optimistic analysts. Furthermore, institutional investors exhibit positive feedback trading behavior and appear to front-run these analysts' forecast errors. We then construct a data set to test the empirical implications of our model. Among our implications, positive feedback trading behavior has already been documented in previous empirical studies. The others are empirically verified here for the first time