Reputation acquisition of underwriter analysts - Theory and evidence

Hefei Wang
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Hefei Wang: University of Illinois at Chicago, http://www.uic.edu/index.html/

Journal of Applied Economics, 2009, vol. 12, 331-363

Abstract: I examine the role of reputation in a multi-stage strategic information transmission game between an analyst and an investor. While reputation mitigates the conflict of interest in a repeated game, it may induce the biased analyst to elevate potential underperformers to the highest rating category, thus undermining the information quality of the highest message. Uncertainty about firm value helps the unbiased analyst to communicate better information in a single stage game. However, in a multi-stage game, uncertainty increases misrepresentation by the biased analyst. Empirical implications are tested. I document that 1) affiliated and unaffiliated analysts recommendations differ only in the Strong Buy category; 2) the underperformance of underwriter analysts recommendations increases with the underlying uncertainty.

Keywords: strategic information transmission; reputational cheap talk; analyst recommendations; market uncertainty (search for similar items in EconPapers)
JEL-codes: D24 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:cem:jaecon:v:12:y:2009:n:2:p:331-363

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