A Catering Theory of Analyst Bias
Richard Lai ()
Finance from University Library of Munich, Germany
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.
Keywords: Analyst bias; behavioral finance; media bias (search for similar items in EconPapers)
JEL-codes: G10 G20 G39 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe and nep-fin
Note: Type of Document - pdf; pages: 99
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
Working Paper: A Catering Theory of Analyst Bias (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpfi:0509004
Access Statistics for this paper
More papers in Finance from University Library of Munich, Germany
Bibliographic data for series maintained by EconWPA ().