Do Sell-Side Analysts Say “Buy” While Whispering “Sell”?

I examine how sell-side equity analysts strategically disclose different information to the public and buy-side mutual fund managers to whom they are connected. I specifically test the possibility that analysts’ public recommendations tell the public to “buy” but they are whispering “sell” to their connected fund managers. I measure the likelihood of such “say buy/whisper sell” behavior based upon the percentage of managers’ selling stocks that analysts recommend buying. Using mutual fund managers’ votes for sell-side analysts in a Chinese “star analyst” competition as a proxy for managers’ evaluations of analysts, I find that managers are more likely to vote for the analysts who exhibit more say buy/whisper sell behavior with these managers. This result suggests that managers receive more-precise information in private communications with an analyst than in the analyst’s public recommendations and reward the favor by voting for the analyst in the “star analyst” competition. This different information disclosure by analysts results in a form of information asymmetry, which incurs a significant cost on uninformed investors; among analysts’ positive recommendations, the stocks bought by the managers who vote for the analysts outperform the stocks sold by these managers around the recommendation dates.