Trading behavior before the public release of analysts' reports

This paper investigates the existence of prerelease information leakage of analyst reports to institution investors. Analysts are likely to provide tips about their reports to institutional investors in order to raise commission revenue. Some previous studies, such as Irvine, Lipson and Puckett (2007) reveal the information leakage of analysts’ reports. However, it is difficult to show the direct link between information contained in analysts’ reports and the prerelease elevation of institutional trading. To determine a direct link between information leakage and institutional trading, this study investigates different trading behaviors between clients and non-clients. The client is defined as the institution trading through the brokerage firm where the recommending analyst is employed. If there is information leakage, the clients’ prerelease trading information is expected to increase more and earlier than the non-clients’. Also, the trading behavior of clients would be different depending on the characteristics of analysts’ forecasts. The overall findings of this study support the information leakage argument in that clients trading behavior differs from that of non-clients before the public release of analysts’ reports.