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Competition and Opportunistic Advice of Financial Analysts: Theory and Evidence


  • Enrico Sette



This work investigates both theoretically and empirically how the behaviour of financial analysts is affected by competition, measured as the strength of coverage of a stock from other analysts. The interaction among analysts and investors is modelled as a dynamic cheap talk game. The theoretical model shows that analysts having a conflict of interest with investors, report information truthfully with higher probability if other, “neutral”, analysts report information on the same stock. This empirical prediction is tested on data about recommendations on IPOs. The main result is that analysts working for the lead underwriter of the IPO (“insiders”) are more optimistic when there are no other analysts (not working for the lead underwriter, “outsiders”) covering the stock. The data also show that insiders do not seem to use the information contained in outsiders recommendations. Finally, outsiders are not influenced by recommendations previously issued by insiders. These results also allow to discriminate between competing hypothesis brought forward to explain insider’s overoptimism. The empirical evidence suggests that insider analysts overoptimism is induced by incentives rather than by a “psychological bias”.Keywords: Competition, Financial Analysts, IPOs, Recommendations.JEL Classi cation codes: D40, D82, G24, L15

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  • Enrico Sette, 2007. "Competition and Opportunistic Advice of Financial Analysts: Theory and Evidence," FMG Discussion Papers dp592, Financial Markets Group.
  • Handle: RePEc:fmg:fmgdps:dp592

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    References listed on IDEAS

    1. Stephen Morris, 2001. "Political Correctness," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 231-265, April.
    2. Andrew R. Jackson, 2005. "Trade Generation, Reputation, and Sell-Side Analysts," Journal of Finance, American Finance Association, vol. 60(2), pages 673-717, April.
    3. Roland Benabou & Guy Laroque, 1992. "Using Privileged Information to Manipulate Markets: Insiders, Gurus, and Credibility," The Quarterly Journal of Economics, Oxford University Press, vol. 107(3), pages 921-958.
    4. Harrison Hong & Jeffrey D. Kubik, 2003. "Analyzing the Analysts: Career Concerns and Biased Earnings Forecasts," Journal of Finance, American Finance Association, vol. 58(1), pages 313-351, February.
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    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General

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