Does Competition Induce Analyst Effort? Evidence from a Natural Experiment of Broker Mergers

42 Pages Posted: 11 Sep 2020

See all articles by Zhen Wang

Zhen Wang

Shanghai University - SHU-UTS SILC Business School

Lei Sun

Boston Consulting Group - Shanghai

K.C. John Wei

Hong Kong Polytechnic University

Date Written: August 2, 2020

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 three additional effects of analyst competition. The analyst effort hypothesis suggests that weaker competition reduces analysts’ incentives to collect and analyze information. The herding hypothesis argues that weaker competition reduces analysts’ career concerns, which in turn reduces herding incentives. The strategic deviation hypothesis implies that weaker competition alleviates analysts’ incentives to strategically deviate from others. We find that after broker mergers, analysts follow fewer firms and switch their coverage from firms with more to those with less R&D expenses. They weigh their private information less when it is unfavorable. At the same time, their forecasts become more dispersed. All these findings appear to be more consistent with the analyst effort hypothesis than the herding or strategic deviation hypothesis.

Keywords: Analyst forecast activities, Competition, Analyst effort, Herding, Strategy deviation

JEL Classification: G14, G17, G24

Suggested Citation

Wang, Zhen and Sun, Lei and Wei, Kuo-Chiang (John), Does Competition Induce Analyst Effort? Evidence from a Natural Experiment of Broker Mergers (August 2, 2020). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3665532

Zhen Wang (Contact Author)

Shanghai University - SHU-UTS SILC Business School ( email )

China

Lei Sun

Boston Consulting Group - Shanghai ( email )

Shanghai
China

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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