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http://ssrn.com/abstract=1354504
 
 

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Competition and Bias


Marcin T. Kacperczyk


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

Harrison G. Hong


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

February 2009

NYU Working Paper No. FIN-08-016

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

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Date posted: March 9, 2009  

Suggested Citation

Kacperczyk, Marcin T. and Hong, Harrison G., Competition and Bias (February 2009). NYU Working Paper No. FIN-08-016. Available at SSRN: http://ssrn.com/abstract=1354504

Contact Information

Marcin T. Kacperczyk (Contact Author)
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
Harrison G. Hong
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
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