Analyst Reputation, Communication, and Information Acquisition

Posted: 3 Jul 2015

See all articles by Xiaojing Meng

Xiaojing Meng

New York University (NYU) - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2015

Abstract

Earlier studies have shown that reputational concerns tend to reduce agents' opportunistic behavior. However, a recent study by Morris argued that analysts' (experts') reputational concerns may discourage truthful communication when they try to avoid being perceived as being misaligned with investors. In this paper, I examine the effect of reputational concerns on communication in a setting where analysts can choose their precision endogenously. Because both misaligned and aligned analysts want investors to trust their reports in the future, both will aim to build a reputation for being aligned. In equilibrium, aligned analysts will acquire more information than misaligned analysts. As a result, investors may favorably update their beliefs about the analysts' type when the report is proven to be accurate. Therefore, both types of analysts will have reputational incentives to communicate truthfully. The paper also derives conditions under which the analysts' reputational concerns have a nonmonotonic impact on aligned analysts' equilibrium precision choices and investors' welfare.

Keywords: cheap-talk, reputation, information acquisition

JEL Classification: D83, M41

Suggested Citation

Meng, Xiaojing, Analyst Reputation, Communication, and Information Acquisition (March 1, 2015). Journal of Accounting Research, Vol. 53, No. 1, 2015, Available at SSRN: https://ssrn.com/abstract=2626076

Xiaojing Meng (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street
Suite 10-180
New York, NY 10012
United States

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