Sell-side Analyst Recommendation Revisions and Hedge Fund Trading before and after Regulation FD

We examine institutional trading in relation to changes in consensus recommendations over time. We find that pre-Reg FD's positive contemporaneous relation between hedge fund trading and change in consensus becomes negative after Reg FD, but the positive relation between non-hedge fund trading and change in consensus continues even after Reg FD. Furthermore, during post-Reg FD, while the performance of hedge funds' trades that contradict with analysts improve, the performance of non-hedge funds' trades that agree with analysts significantly deteriorate. Our evidence suggests that hedge funds have better information processing skill and are more cognizant about the role of selective information in analyst recommendations