Analyst Reputation, Communication and Information Acquisition
58 Pages Posted: 17 Nov 2014
Date Written: November 10, 2014
Earlier studies have shown that reputational concerns tend to reduce agents' opportunistic behavior. However, a recent study by Morris (2001) 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 non-monotonic impact on aligned analysts' equilibrium precision choices and investors' welfare.
Keywords: cheap-talk, reputation, information acquisition
JEL Classification: D83, M41
Suggested Citation: Suggested Citation