We posit a theory that runs counter to how conventional wisdom thinks about analyst bias, that it is the result of distorted incentives by "the system" - especially upstream factors like the analysts' employers. We suggest that analysts are also heavily influenced by what investors believe, the purported victims of analyst bias. We adapt Mullainathan-Shleifer's theory of media bias to build a theory of how analysts cater to what investors believe. The theory also predicts that competition among analysts does not reduce their bias. We provide empirical support for this theory, using an enormous dataset built from over 6.5 million analyst estimates and 42.8 million observations on investor holdings, which we argue is a proxy for what they believe. We use a simultaneous-equations model for estimation, with instruments to rule out alternative interpretations of the direction of causality. For additional robustness, we investigate the time series of analyst bias and heterogeneity in investor beliefs from 1987 through 2003. Dickey-Fuller tests show that both have unit roots, but we establish that cointegration hold. Further, we employ a vector-autoregressive model to show Granger - causality between the two.
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number
4761.
Find related papers by JEL classification: M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
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Sendhil Mullainathan & Andrei Shleifer, 2005.
"The Market for News,"
American Economic Review,
American Economic Association, vol. 95(4), pages 1031-1053, September.
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