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Competition and opportunistic advice of financial analysts: theory and evidence

Sette, Enrico (2007) Competition and opportunistic advice of financial analysts: theory and evidence. Discussion paper, 592. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

This work investigates both theoretically and empirically how the behaviour of financial analysts is affected by competition, measured as the strength of coverage of a stock from other analysts. The interaction among analysts and investors is modelled as a dynamic cheap talk game. The theoretical model shows that analysts having a conflict of interest with investors, report information truthfully with higher probability if other, “neutral”, analysts report information on the same stock. This empirical prediction is tested on data about recommendations on IPOs. The main result is that analysts working for the lead underwriter of the IPO (“insiders”) are more optimistic when there are no other analysts (not working for the lead underwriter, “outsiders”) covering the stock. The data also show that insiders do not seem to use the information contained in outsiders recommendations. Finally, outsiders are not influenced by recommendations previously issued by insiders. These results also allow to discriminate between competing hypothesis brought forward to explain insider’s overoptimism. The empirical evidence suggests that insider analysts overoptimism is induced by incentives rather than by a “psychological bias”.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2007 The Author
Library of Congress subject classification: H Social Sciences > HF Commerce
H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
Journal of Economic Literature Classification System: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L15 - Information and Product Quality; Standardization and Compatibility
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
G - Financial Economics > G2 - Financial Institutions and Services > G24 - Investment Banking; Venture Capital; Brokerage; Rating Agencies
D - Microeconomics > D4 - Market Structure and Pricing > D40 - General
Sets: Research centres and groups > Financial Markets Group (FMG)
Collections > Economists Online
Collections > LSE Financial Markets Group (FMG) Working Papers
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Identification Number: 592
Date Deposited: 16 Jul 2009 14:59
URL: http://eprints.lse.ac.uk/24487/

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