Under-Weighting of Private Information by Top Analysts

Abstract

It is conventionally perceived in the literature that weak analysts are likely to under-weight their private information and strategically bias their announcements in the direction of the public beliefs to avoid scenarios where their private information turns out to be wrong, whereas strong analysts tend to adopt an opposite strategy of over-weighting their private information and shifting their announcements away from the public beliefs in an attempt to stand out from the crowd. Analyzing a reporting game between two financial analysts, who are compensated based on their relative forecast accuracy, we demonstrate that it could be the other way around. An investigation of the equilibrium in our game suggests that, contrary to the common perception, analysts who benefit from information advantage may strategically choose to understate their exclusive private information and bias their announcements toward the public beliefs, while exhibiting the opposite behavior of overstating their private information when they estimate that their peers are likely to be equally informed.

Keywords: Security analysts; Earnings forecasts; Bias; Misreporting; Understatement of private information; Overstatement of private information; Relative ranking; Forecasting contests

JEL Classification: C72; D82; G17; G29; M41