Analyst coverage and types of institutional investors

Purpose - The purpose of this paper is to study the relationship between institutional holdings and analyst coverage in the context of the heterogeneous nature of institutional investors.Design/methodology/approach - Similar to prior studies (e.g. Ke and Ramalingegowda; Ramalingegowda and Yu), this paper obtains institutional investors' trading classifications (transient, dedicated, and quasi-indexing) from Brian Bushee directly. To examine the hypotheses, the paper uses a two-step instrumental variable approach demonstrated in O'Brien and Bhushan to mitigate the simultaneity relationship between the change in analyst coverage and the change in the number of heterogeneous institutional investors.Findings - The findings suggest that such relations are different among transient, dedicated, and quasi-indexing institutional investors. Specifically, there are three major results. First, a change to the number of analyst coverage has the lowest impact on the change in the number of dedicated institutional investors. Second, a change in the number of transient institutional investors has a higher impact on change in analyst coverage than those for change in the number of dedicated and quasi-indexing institutional investors. Third, changes to analysts' buy or sell recommendations have the least impact on the change in the number of dedicated institutions, relative to transient and quasi-indexing institutions.Research limitations/implications - The findings suggest that institutional investors are not homogeneous. Research studies on institutional investors need to disentangle the differences among different types of institutions.Originality/value - The paper provides a comprehensive study on different institutional investors and analyst coverage. The findings show the complex nature of the interaction between institutional investors and analyst coverage