Should Analysts Act Alone?
45 Pages Posted: 1 Nov 2006
Date Written: October 2006
Analysts and the financial press are often accused of paying too much attention to one another, instead of providing their own independent analyses of fundamental information. Prior research suggests that such mutual observation can render consensus forecasts too extreme, more redundant, and less informative, and that investors will fail to anticipate these effects, leading investors to hold overly extreme beliefs with excessive confidence. We find that mutual observation in a laboratory setting does increase the extremity of consensus forecasts, but not excessively, and improves accuracy when incentives for accuracy are high as a result of the target firm experiencing recent abnormal performance. A second experiment shows that investors account appropriately for the effects of mutual observation. Overall, the results are consistent with an economic model in which analysts and investors are effort-averse Bayesians.
Suggested Citation: Suggested Citation