Incentives for Accuracy in Analyst Research
AbstractThis paper proposes a model to analyze the dynamic relations between incentive contracts and analysts' effort in providing accurate research when both ethical and reputational concerns matter. First, we show that reputation picks up ability and thus serves as a sorting device: when analysts have a relatively low reputation for providing research quality (below a threshold level) banks find it more profitable to offer a mix of monetary and non monetary (ethic based) incentives and rely on the analyst's work ethic in ordre to provide research quality. Alternatively, when analysts have a high reputation, full financial (performance based) incentives contracts offer a substantial reward for their contribution to the firm's profits. Second, we find that the design of compensation contracts, in the presence of reputational concerns and work ethic, may lead to incentive problems: full financial incentives contracts may exacerbate conflicts of interest by giving analysts extrinsic rewards on reporting, thereby inducing them to prefer high short term benefits to the detriment of long term research and coverage effort. On the contrary, a mix of monetary and non monetary rewards based on the analyst's work ethic may allow them to resist pressures from conflicts of interest and induces a high research effort thus enhancing long-run reputation.
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Date of creation: 02 Feb 2011
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Motivation; Reputation; Reporting; Investment analysts.;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-12 (All new papers)
- NEP-CTA-2011-02-12 (Contract Theory & Applications)
- NEP-HRM-2011-02-12 (Human Capital & Human Resource Management)
- NEP-LAB-2011-02-12 (Labour Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-86.
- Noe, Thomas H & Rebello, Michael J, 1994. "The Dynamics of Business Ethics and Economic Activity," American Economic Review, American Economic Association, vol. 84(3), pages 531-47, June.
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