Competition and Bias

54 Pages Posted: 9 Mar 2009  

Marcin T. Kacperczyk

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

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: February 2009

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.

Suggested Citation

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

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

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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