Analyst Recommendations: Evidence on Hedge Fund Activism and Managerial Ability

摘要

This study investigates analysts' attitudes toward the cooperation/conflict between hedge fund activists and target firm management by examining the impact of managerial ability on analyst recommendations around hedge fund activism. We find that analysts are more likely to reiterate recommendations and less likely to downgrade recommendations for target firms with high managerial skills following the arrival of hedge fund activists. This may be because analysts recognize advantages associated with target firm management's superior ability that enables managers to avoid costly fights with hedge fund activists. We also show that stronger managerial ability is associated with the higher analyst forecast accuracy during hedge fund intervention. Our results are robust to a cross-sectional analysis of recommendation changes after activists' takeover. Collectively, our evidence supports the positive impact of managerial ability on analysts' opinions within the context of hedge fund activist campaigns and sheds light on the information gathering and processing ability of financial analysts.