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Credibility and cheap talk of securities analysts: theory and evidence

Blanes i Vidal, Jordi (2003) Credibility and cheap talk of securities analysts: theory and evidence. Discussion paper, 472. Financial Markets Group, London School of Economics and Political Science, London, UK.

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Abstract

This paper studies how investors react to public messages that may be optimistically biased. We first construct a communication game between an investor and a (possibly) biased securities analyst. We find an equilibrium characterised by the following properties: first, the investor reacts more to bad news than to good news, and second, the difference in this reaction is higher when the investor has a greater prior suspicion that the analyst is a biased type. We then use nonparametric techniques and a large database of earnings forecasts to test these predictions, and find that the evidence supports them. Lastly, we use our empirical strategy to discriminate between the causes for analysts’ bias.

Item Type: Monograph (Discussion Paper)
Official URL: http://fmg.lse.ac.uk
Additional Information: © 2003 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: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C14 - Semiparametric and Nonparametric Methods
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency; Event Studies
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: 472
Date Deposited: 19 Aug 2009 09:57
URL: http://eprints.lse.ac.uk/24897/

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