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An Analysis of Stock Recommendations

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Author Info
 Morgan, John
Stocken, Phillip C

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Abstract

We study the information content of stock reports when investors are uncertain about a financial analyst's incentives. Incentives may be aligned, in which case the analyst wishes to credibly convey information, or incentives may be misaligned. We find the following: Any investor uncertainty about incentives makes full revelation of information impossible. Categorical ranking systems, such as those commonly used by brokerages, arise endogenously as equilibria. Under certain conditions, analysts with aligned incentives can credibly convey unfavorable information but can never credibly convey favorable information. Finally, we compare testable implications of the model to empirical properties of stock recommendations. Copyright 2003 by the RAND Corporation.

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Publisher Info
Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 34 (2003)
Issue (Month): 1 (Spring)
Pages: 183-203
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Handle: RePEc:rje:randje:v:34:y:2003:i:1:p:183-203

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  1. Antonio Cabrales & Piero Gottardi, 2008. "Markets for information : of inefficient firewalls and efficient monopolies," Economics Working Papers we080201, Universidad Carlos III, Departamento de Economía. [Downloadable!]
  2. Alvaro Sandroni & Wojciech Olszewski, 2008. "Manipulability of Future-Independent Tests," PIER Working Paper Archive 08-014, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania. [Downloadable!]
  3. Ming Li, 2003. "To Disclose or Not to Disclose: Cheap Talk with Uncertain Biases," Working Papers 04003, Concordia University, Department of Economics, revised Aug 2004. [Downloadable!]
  4. Bourjade, Sylvain & Jullien, Bruno, 2004. "Expertise and Bias in Decision Making," MPRA Paper 7251, University Library of Munich, Germany, revised Jan 2007. [Downloadable!]
  5. Oliver Board & Tiberiu Dragu, 2006. "Expert Advice with Multiple Decision Makers," Working Papers 242, University of Pittsburgh, Department of Economics, revised Jan 2006. [Downloadable!]
  6. Philippe Jehiel & Frédéric Koessler, 2006. "Revisiting Games of Incomplete Information with Analogy-Based Expectations," Levine's Bibliography 122247000000000252, UCLA Department of Economics. [Downloadable!]
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  7. Andreas Blume & Oliver Board & Kohei Kawamura, 2007. "Noisy Talk," ESE Discussion Papers 167, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
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    • Board, Oliver J. & Blume, Andreas & Kawamura, Kohei, 2007. "Noisy talk," Theoretical Economics, Society for Economic Theory, vol. 2(4), December. [Downloadable!]
  8. Shin, Hyun Song, 2002. "Disclosures and Asset Returns," CEPR Discussion Papers 3345, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  9. Ilan Guttman & Ohad Kadan & Eugene Kandel, 2003. "Adding the Noise: A Theory of Compensation-Driven Earnings Management," Discussion Paper Series dp355, Center for Rationality and Interactive Decision Theory, Hebrew University, Jerusalem. [Downloadable!]
  10. Archishman Chakraborty & Rick Harbaugh, 2004. "Comparative Cheap Talk," Working Papers 2004-08, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
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  11. Ettore Damiano & Hao Li & Wing Suen, 2006. "Credible Ratings," Working Papers tecipa-219, University of Toronto, Department of Economics. [Downloadable!]
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  12. Marco Ottaviani & Peter Norman Sørensen, 2004. "The Strategy of Professional Forecasting," FRU Working Papers 2004/05, University of Copenhagen. Department of Economics (formerly Institute of Economics). Finance Research Unit. [Downloadable!]
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  13. Santiago Sanchez-Pages & Marc Vorsatz, 2004. "An Experimental Study of Truth-Telling in a Sender-Receiver Game," ESE Discussion Papers 128, Edinburgh School of Economics, University of Edinburgh. [Downloadable!]
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  14. Vincent P. Crawford, 2003. "Lying for Strategic Advantage: Rational and Boundedly Rational Misrepresentation of Intentions," American Economic Review, American Economic Association, vol. 93(1), pages 133-149, March. [Downloadable!] (restricted)
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  15. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2004. "Conflicts of Interest, Information Provision and Competition in Banking," Economics Working Papers 760, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  16. Vijay Krishna & John Morgan, 1999. "A Model of Expertise," Game Theory and Information 9902003, EconWPA. [Downloadable!]
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  17. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2004. "Conflicts of Interest, Information Provision, and Competition in Banking," NBER Working Papers 10571, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Archishman Chakraborty & Rick Harbaugh, 2003. "Ordinal Cheap Talk," Claremont Colleges Working Papers 2003-05, Claremont Colleges. [Downloadable!]
  19. Archishman Chakraborty & Rick Harbaugh, 2006. "Multidimensional Cheap Talk with Transparent Motives," Working Papers 2006-10, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy. [Downloadable!]
  20. Joel Shapiro & Patrick Bolton & Xavier Freixas, 2004. "Conflicts of Interest and Credible Information Provision by Specialized and One-Stop Banks," Econometric Society 2004 North American Winter Meetings 132, Econometric Society. [Downloadable!]
  21. Ulrike Malmendier & Devin Shanthikumar, 2007. "Do Security Analysts Speak in Two Tongues?," NBER Working Papers 13124, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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