Quantitative Investing and Sell-Side Financial Analysts

Abstract

Quantitative mutual funds and ETFs have become an increasingly important part of the equity market, with total assets under management nearly tripling in the last decade. This paper measures the relative percentage of firms’ stock owned by quantitative mutual funds and ETFs (hereafter, quantitative ownership) and examines how it impacts the production of information in the capital market, as evidenced by the changing role of financial analysts. Given that the inputs to quantitative investing models are typically not obtained from information in analyst reports, I hypothesize that quantitative investors discourage analysts’ information production. In support of this hypothesis, I find that quantitative ownership is negatively correlated with analyst following and this relationship is robust to using an instrument for quantitative ownership based on cases of mutual fund advisory misconduct. I also find that quantitative ownership has an adverse effect on analyst outputs, namely forecast accuracy, the number of dimensions forecasted, the informativeness of analyst forecast revisions, and forecast dispersion. Overall, the paper provides evidence on the impact of quantitative investing on the information environment through its effect on analysts, an important information intermediary.