When Machine Comes to Town: Fund Analysts’ Performance with Artificial Intelligence

How does the introduction of artificial intelligence (AI) technology affect the performance of mutual fund analysts? Using a unique setting in which AI was introduced to generate ratings for previously uncovered mutual funds in a large financial research company, we find that the analyst ratings’ predictive power for future fund performance increases, suggesting higher rating quality. Further difference-in-differences analyses suggest two possible mechanisms through which AI adoption involving a separate set of funds affects the quality of human ratings: the reduction of analyst favoritism towards socially connected fund managers, and the availability of ratings for a large set of previously uncovered benchmark funds. The effects of AI adoption on fund analysts are more pronounced for analysts with stronger social ties with fund managers and higher past performance. This paper contributes to the growing literature on the interaction between AI and humans and provides unique insights on the mechanisms through which AI affects human performance.