The Effects of Investors' Information Acquisition On Sell-Side Analysts Forecast Bias

27 Pages Posted: 2 Jul 2021 Last revised: 20 Jul 2021

See all articles by José Astaiza-Gómez

José Astaiza-Gómez

Universidad del Rosario - Faculty of Economics

Date Written: June 20, 2021

Abstract

In this research I empirically study the effects of information acquisition by investors or traders on analysts' forecast bias. Based on the theoretical literature on sell-side analysts, I argue that forecast bias is correlated to investors' information gathering, in two opposite directions. On the one hand, higher levels of reading activities about individual firms by investors induce analysts to issue more optimistic forecasts if the potential for trading is higher. On the other hand, higher levels of reading activities about individual firms by investors help them identify opportunistic behaviors and thus to discipline analysts. I find that investors' information acquisition is positively related to analysts' optimism when the potential for trading is larger, and negatively related to optimism when investors are more likely to identify inflated forecasts. Together, these results suggest that information acquisition is not only correlated to analysts' optimism but also that its effect does not work trivially and solely in one direction but it activates two different incentives in analysts' decisions.

Keywords: trading incentives, analyst's credibility, responsive investors, naive investors.

JEL Classification: M21, M37, G11, G14, G23, G24

Suggested Citation

Astaiza-Gómez, José Gabriel, The Effects of Investors' Information Acquisition On Sell-Side Analysts Forecast Bias (June 20, 2021). Available at SSRN: https://ssrn.com/abstract=3870796 or http://dx.doi.org/10.2139/ssrn.3870796

José Gabriel Astaiza-Gómez (Contact Author)

Universidad del Rosario - Faculty of Economics ( email )

Casa Pedro Fermín
Calle 14 # 4-69
Bogota
Colombia

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