We posit a theory that runs counter to how conventional wisdom thinks about analyst bias, that it is the result of distorted incentives by “upstream” factors like the analysts’ employers. We suggest that analysts are also heavily influenced by the beliefs of investors downstream, 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 investors’ beliefs. 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 holds. Further, we employ a vector- autoregressive model to show Granger-causality between the two.
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References listed on IDEAS 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.:
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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