The informational role of institutional investors and financial analysts in the market

We provide empirical evidence on the impact of limited market participation on the informational role played by institutions and analysts in the market. Our findings are as follow. First, the price adjustment of stocks that are favored by institutions and analysts and associated with low information set-up costs helps better predict market-wide information. Second, firms that are primarily held by individuals and followed by fewer analysts tend to respond more sluggishly to market-wide information than do firms that are primarily held by institutions and followed by more analysts. This finding is partially attributed to public information generated by the high institutional-ownership and analyst coverage firms with good corporate governance. Third, high institutional-ownership portfolios and high analyst coverage portfolios play a complementary role in predicting market returns. Fourth, there is little systematic difference between high institutional-ownership portfolios and high analyst coverage portfolios in predicting the returns of stocks with different characteristics. Fifth, good market-wide news diffuses more slowly across securities than does bad market-wide news, and this finding primarily occurs in periods of NBER-dated expansions.