Under-Weighting of Private Information by Top Analysts

58 Pages Posted: 18 Aug 2015 Last revised: 28 Aug 2016

See all articles by Gil Aharoni

Gil Aharoni

University of Melbourne; Financial Research Network (FIRN)

Eti Einhorn

Tel Aviv University

Qi Zeng

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2015

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

Suggested Citation

Aharoni, Gil and Einhorn, Eti and Zeng, Qi, Under-Weighting of Private Information by Top Analysts (August 17, 2015). Available at SSRN: https://ssrn.com/abstract=2645591 or http://dx.doi.org/10.2139/ssrn.2645591

Gil Aharoni (Contact Author)

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Eti Einhorn

Tel Aviv University ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel

Qi Zeng

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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