Abstract

http://ssrn.com/abstract=1101626
 
 

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Citations (31)



 


 



Competition and Bias


Harrison G. Hong


Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Marcin T. Kacperczyk


Imperial College London - Accounting, Finance, and Macroeconomics; National Bureau of Economic Research (NBER)

March 2008

EFA 2008 Athens Meetings Paper
AFA 2009 San Francisco Meetings Paper

Abstract:     
We attempt to measure the effect of competition on bias in the context of analyst earnings forecasts, which are known to be excessively optimistic due to conflicts of interest. Our instrument for competition is mergers of brokerage houses, which result in the firing of analysts because of redundancy (e.g., one of the two oil analysts is let go) and other reasons such as culture clash. We use this decrease in analyst coverage for stocks covered by both merging houses before the merger (the treatment sample) to measure the causal effect of competition on bias. We find the treatment sample simultaneously experiences a decrease in analyst coverage and an increase in optimism bias the year after the merger relative to a control group of stocks, consistent with competition reducing bias. The implied economic effect from our natural experiment is significantly larger than estimates from OLS regressions that do not correct for the endogeneity of coverage. And this effect is much more significant for stocks with little initial analyst coverage or competition.

Number of Pages in PDF File: 54

Keywords: analyst bias, competition

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Date posted: March 17, 2008  

Suggested Citation

Hong, Harrison G. and Kacperczyk, Marcin T., Competition and Bias (March 2008). ; AFA 2009 San Francisco Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1101626 or http://dx.doi.org/10.2139/ssrn.1101626

Contact Information

Harrison G. Hong (Contact Author)
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Marcin T. Kacperczyk
Imperial College London - Accounting, Finance, and Macroeconomics ( email )
South Kensington campus
London SW7 2AZ
United Kingdom
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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