Analyst Optimism and Buy-Side Institutions: Evidence from Analyst Transition from Sell-Side to Buy-Side

Using career information collected from professional networking sites, I identify sell-side analysts who transition to buy-side institutions, and examine whether these transitioning analysts cater to their future buy-side employers before the transition. I find that, prior to the transition, transitioning analysts produce more favorable research toward stocks that are significant in the portfolios of their future employers. Importantly, I find the favoritism effects are stronger for stocks for which a single analyst's impact is likely to be large, namely, small-cap stocks and stocks with low analyst coverage. I also find such favoritism is present only during the year immediately prior to the transition. Moreover, the favoritism is present only among analysts who immediately transition to the buy-side, and not among those who move to the buy-side after a prolonged transition gap (i.e., where strategic behavior is less likely). These findings are consistent with the career concern hypothesis that sell-side analysts cater to their future buy-side employers to advance their careers.