Does Competition Induce Hardworking or Herding? Evidence from a Natural Experiment of Broker Mergers

57 Pages Posted: 8 Aug 2017

See all articles by Lei Sun

Lei Sun

School of Finance, Shanghai University of Finance and Economics

Zhen Wang

Shanghai University of Finance and Economics

K.C. John Wei

Hong Kong Polytechnic University

Date Written: August 7, 2017

Abstract

Hong and Kacperczyk (2010) document that decreases in analyst competition due to broker mergers encourage analysts to please managers, leading to greater consensus optimism bias. We propose two addition effects of analyst competition. The hardworking hypothesis suggests that lower competition among analysts reduces their incentives to collect and analyze information, leading to less accurate forecasts and less informativeness on earnings or recommendation revisions. The herding hypothesis argues that lower competition reduces their career concerns and herding incentives. Analyst therefore place less (more) weight on common public (private) information, leading to more accurate forecasts and more informative forecast and recommendation revisions. We find evidence that is more consistent with the hardworking hypothesis than the herding hypothesis or the optimism-bias hypothesis.

Keywords: Competition, Analyst forecast activities, Hardworking, Herding, Optimism bias

JEL Classification: G14, G17, G24

Suggested Citation

Sun, Lei and Wang, Zhen and Wei, Kuo-Chiang (John), Does Competition Induce Hardworking or Herding? Evidence from a Natural Experiment of Broker Mergers (August 7, 2017). Available at SSRN: https://ssrn.com/abstract=3014578 or http://dx.doi.org/10.2139/ssrn.3014578

Lei Sun

School of Finance, Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Zhen Wang (Contact Author)

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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