We examine how the market's ability to assess the truthfulness of management earnings forecasts affects how managers bias their forecasts, and we evaluate whether the market's response to management forecasts is consistent with it identifying predictable forecast bias. We find managers' willingness to misrepresent their forwardlooking information as a function of their incentives varies with the market's ability to detect misrepresentation. We examine incentives induced by the litigation environment, insider trading activities, firm financial distress, and industry concentration. With regard to the stock price response to forecasts, we find the market varies its response with the predictable bias in the forecast. The efficiency of the market's response, however, varies with the forecast news.

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We study the information content of stock reports when investors are uncertain about a Þnancial analyst's incentives. Incentives may be aligned, in which case the analyst wishes to credibly convey his information, or incentives may be misaligned. We Þnd that: (a) Any investor uncertainty about incentives makes full revelation of information impossible. (b) Categorical ranking systems, such as those commonly used by brokerages, arise endogenously as equilibria. (c) Under certain conditions, analysts with aligned incentives can credibly convey unfavorable information, but can never credibly convey favorable information. (d) Policies that improve transparency of analyst incentives might reduce the information content of stock reports. Finally, we examine testable implications of the model compared to empirical analyses of stock recommendations.JEL #s: G24, D82