Credibility and Cheap Talk of Securities Analysts: Theory and Evidence

44 Pages Posted: 13 Jan 2004

Date Written: October 2003

Abstract

This paper studies how investors react to public messages that may be optimistically biased. We first construct a communication game between an investor and a (possibly) biased securities analyst. We find an equilibrium characterised by the following properties: first, the investor reacts more to bad news than to good news, and second, the difference in this reaction is higher when the investor has a greater prior suspicion that the analyst is a biased type. We then use nonparametric techniques and a large database of earnings forecasts to test these predictions, and find that the evidence supports them. Lastly, we use our empirical strategy to discriminate between the causes for analysts' bias.

Keywords: Cheap Talk, Credibility, Securities Analysts, Stock Market Reaction

JEL Classification: D82, G14, G24

Suggested Citation

Blanes i Vidal, Jordi, Credibility and Cheap Talk of Securities Analysts: Theory and Evidence (October 2003). Available at SSRN: https://ssrn.com/abstract=456160 or http://dx.doi.org/10.2139/ssrn.456160

Jordi Blanes i Vidal (Contact Author)

London School of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 (0) 779 51 61 034 (Phone)

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