Credibility and Cheap Talk of Securities Analysts:Theory and Evidence
AbstractThis 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 di.erence 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.
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Bibliographic InfoPaper provided by Financial Markets Group in its series FMG Discussion Papers with number dp472.
Date of creation: Nov 2003
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- Ismail Saglam & Mehmet Y. Gurdal & Ayca Ozdogan, 2011.
"Truth-telling and Trust in Sender-receiver Games with Intervention,"
KoÃ§ University-TUSIAD Economic Research Forum Working Papers
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- Kartik, Navin & Ottaviani, Marco & Squintani, Francesco, 2007. "Credulity, lies, and costly talk," Journal of Economic Theory, Elsevier, vol. 134(1), pages 93-116, May.
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