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An Analysis of Stock Recommendations


  • Morgan, John
  • Stocken, Phillip C


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.

Suggested Citation

  • Morgan, John & Stocken, Phillip C, 2003. " An Analysis of Stock Recommendations," RAND Journal of Economics, The RAND Corporation, vol. 34(1), pages 183-203, Spring.
  • Handle: RePEc:rje:randje:v:34:y:2003:i:1:p:183-203

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    References listed on IDEAS

    1. Marshall Robert C. & Meurer Michael J. & Richard Jean-Francois & Stromquist Walter, 1994. "Numerical Analysis of Asymmetric First Price Auctions," Games and Economic Behavior, Elsevier, vol. 7(2), pages 193-220, September.
    2. Farrell, Joseph & Shapiro, Carl, 1990. "Horizontal Mergers: An Equilibrium Analysis," American Economic Review, American Economic Association, vol. 80(1), pages 107-126, March.
    3. Burguet Roberto & Perry Martin K, 2007. "Bribery and Favoritism by Auctioneers in Sealed-Bid Auctions," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-27, June.
    4. Encaoua, David & Jacquemin, Alexis, 1980. "Degree of Monopoly, Indices of Concentration and Threat of Entry," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 21(1), pages 87-105, February.
    5. Mailath, George J. & Zemsky, Peter, 1991. "Collusion in second price auctions with heterogeneous bidders," Games and Economic Behavior, Elsevier, vol. 3(4), pages 467-486, November.
    6. Sen, Amartya, 1997. "On Economic Inequality," OUP Catalogue, Oxford University Press, number 9780198292975, June.
    7. Lance Brannman & Luke M. Froeb, 2000. "Mergers, Cartels, Set-Asides, and Bidding Preferences in Asymmetric Oral Auctions," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 283-290, May.
    8. Joseph Farrell & Carl Shapiro, 1990. "Asset Ownership and Market Structure in Oligopoly," RAND Journal of Economics, The RAND Corporation, vol. 21(2), pages 275-292, Summer.
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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other


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