The Reputation-Accuracy Relationship in Analyst Research

Posted: 6 Mar 2008

See all articles by Patricia Crifo

Patricia Crifo

Ecole Polytechnique, Paris - Laboratoire d'Econometrie; Université Paris X Nanterre - Department of Economics; Center for Interuniversity Research and Analysis on Organization (CIRANO)

Hind Sami

University of Lyon - Lyon 2-COACTIS

Date Written: March 4, 2008

Abstract

The theory presented in this paper models a dynamic interaction between reputation and underwriting pressure in analyst research. We examine how these conflicting incentives affect the analysts' forecasts strategy and how investment banks may design compensation contracts that induce their analysts to perform the conflicting tasks. First, we show that the bank will propose a full incentives contract - one that offers performance-based incentives for both tasks - when reputation is above a threshold level and a partial incentives contract - one that offers performance-based incentives for providing forecast quality and standard-based incentives for generating trading volume - otherwise. The model also shed light about how the "reputation effect" and the "underwriting pressure effect" interact in determining research quality. We thus show that under the full performance-based contract, first period research effort is lower than under the partial performance-based contract. This translates into a higher first period research effort for analysts working in lower status banks compared to those working at high status banks. Our results corroborate previous evidence suggesting that analysts are subject to investment banking and brokerage pressure thereby affecting their forecasts accuracy.

Keywords: Motivation, Reputation, Reporting, Investment analysts

JEL Classification: M54, M52, G24

Suggested Citation

Crifo, Patricia and Sami, Hind, The Reputation-Accuracy Relationship in Analyst Research (March 4, 2008). Available at SSRN: https://ssrn.com/abstract=1102726

Patricia Crifo

Ecole Polytechnique, Paris - Laboratoire d'Econometrie ( email )

Route de Saclay
Palaiseau, 91128
France

Université Paris X Nanterre - Department of Economics

Nanterre Cedex, 92001
France

Center for Interuniversity Research and Analysis on Organization (CIRANO)

2020 rue University, 25th floor
Montreal H3C 3J7, Quebec
Canada

Hind Sami (Contact Author)

University of Lyon - Lyon 2-COACTIS ( email )

Faculté de Sciences Economiques et de Gestion
16, quai Claude Bernard
Lyon, 69007
France

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