Financial Analysts: incentives, biases and information production

Financial analysts are among the key producers of information in equity markets. They issue stock recommendations, publish earnings forecasts and company research reports, and issue target stock prices for the companies they follow. Several studies have shown that analyst research is valuable for investors. Another stream of research has documented that analyst incentives induce them to publish biased research - for example, the fear of losing access to company information may induce them to issue optimistic forecast and recommendations. The project is at the intersection of these two streams of research. We propose to examine how the incentives and biases of analysts affect the quality of their investment advice. In particular, we will focus on the information flows from companies to analysts, and from analysts to investors.The project will explore several research directions:- Analyst performance has been shown to be persistent. Is this due to intrinsic analyst ability or to privileged access to information flows for certain analysts? Focusing on exogenous changes to the information flows available to analysts will enable us to disentangle these two explanations.- Analyst performance can be measured along objective, market-based criteria, as well as subjective, ranking-based criteria, where the ranks emerge from the polling of analyst clients. Since rankings are important determinants of analysts´ careers, a potential conflict of interest exists, perhaps pushing the analyst to facilitate information flows toward clients with more weight. We will examine consequences of such a conflict for analyst investment value.- While on average analysts have been shown to be bullish, perhaps for incentive reasons, we plan on exploiting the cross-section of analyst bullishness and relate it to the value of analyst investment advice.The findings of this project will help understand the link between analyst incentives and the investment value of analyst research. While analyst incentives and the investment value of analyst research have received extensive attention from academics, the link between the two has been relatively underexplored.Investment professionals will obtain valuable insights from the results of this project, as analyst research is an important input in professional investors´ trading strategies.