Rational Bias and Herding in Analysts' Recommendations

Kim, Min S.; Zapatero, Fernando

doi:10.2139/ssrn.1223863

Cited by 7 publications

(4 citation statements)

References 22 publications

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“…As the accuracy of analysts’ forecasts is an important determinant of their professional reputation, promotion opportunities, and compensation, we assume that the payoffs of the two analysts are a function of their forecast errors. However, unlike the widely employed assumption that analysts aim at minimizing their absolute forecast error, we rather assume that both analysts are only interested in their relative ranking (e.g., Laster, Bennett, and Geoum [], Ottaviani and Sorensen [], Kim and Zapatero []). Accordingly, each analyst in our model wishes to exhibit a forecast error that is lower than that of the competitor.…”

Section: Modelmentioning

confidence: 99%

“…Our main assumption is that each analyst does not care about his absolute forecast error, but rather wishes to exhibit better forecast accuracy relative to the other analyst. This modeling assumption has been previously employed in the literature by Laster, Bennett, and Geoum [], Ottaviani and Sorensen [], and Kim and Zapatero []. It is motivated by the common practice of ranking analysts’ performance (e.g., rankings published by the Institutional Investors Magazine , Wall Street Journal , Financial Times , Forbes Magazine , and several Internet Web sites) and the importance of such rankings in determining the professional reputation of individual analysts, their promotion opportunities and their potential wage (e.g., Hong, Kubick, and Solomon [], Hong and Kubik [], Emery and Li [], Groysberg, Healy, and Maber [], Aharoni, Shemesh, and Zapatero []).…”

Section: Modelmentioning

confidence: 99%

See 1 more Smart Citation

Under weighting of Private Information by Top Analysts

Aharoni

Einhorn

Zeng

2016

Journal of Accounting Research

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It is conventionally perceived in the literature that weak analysts are likely to under weight their private information and strategically bias their announcements in the direction of the public beliefs to avoid scenarios where their private information turns out to be wrong, whereas strong analysts tend to adopt an opposite strategy of over weighting their private information and shifting their announcements away from the public beliefs in an attempt to stand out from the crowd. Analyzing a reporting game between two financial analysts, who are compensated based on their relative forecast accuracy, we demonstrate that it could be the other way around. An investigation of the equilibrium in our game suggests that, contrary to the common perception, analysts who benefit from information advantage may strategically choose to understate their exclusive private information and bias their announcements toward the public beliefs, while exhibiting the opposite behavior of overstating their private information when they estimate that their peers are likely to be equally informed.

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Section: Modelmentioning

confidence: 99%

Section: Modelmentioning

confidence: 99%

Under weighting of Private Information by Top Analysts

Aharoni

Einhorn

Zeng

2016

Journal of Accounting Research

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show abstract

“…Otherwise, analysts cease their effort to become better informed and revert to herding. Kim and Zapatero (2009) argue that relative performance evaluation is the primary driver of analysts' herding. They further propose that herding is most likely to occur when the market comprises strong penalties for underperforming analysts.…”

Section: Related Literaturementioning

confidence: 99%

Strategic Coordination in Forecasting. An Experimental Study

et al. 2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. poor performances of prediction markets as resulting from the distinct incentives that forecasters face. While this notion has been considered theoretically and empirically, the underlying behavioral working mechanisms have not yet been described. We thus put forth an exploratory experiment on the emergence and robustness of coordination in a forecasting setting implementing contradictory incentives for accurate forecasts and coordination. Terms of use: Documents inForecasts are shown to be inaccurate and biased toward current values. This in turn has subjects aiming at coordination benefits. Predominantly, coordination is achieved through the risk-dominant equilibrium as the game proceeds. Once established, coordination is fairly stable and adds to overall welfare. Our results support the assumption of rational herding as a driving force for predictions of poor accuracy that are systematically biased towards focal points.

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“…Zitzewitz (2001), Bernhardt et al (2006) and Naujoks et al (2009) nd an anti-herding behaviour in the same context. Kim and Zapatero (2009) and Jegadeesh and Kim (2010) among others use analysts' investment recommendation to provide empirical evidence for herding behaviour.…”

Section: Introductionmentioning

confidence: 99%

Analyst Behaviour: The Geography of Social Interaction

König

2012

SSRN Journal

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In this paper, I provide empirical evidence that an analyst working in Germany is more likely to publish a high (low) price target regarding a DAX30 stock when other Germany based analysts are also optimistic (pessimistic) about the same stock. This e ect of geographical proximity is not biased by the fact that DAX30 companies are headquartered in Germany. Shedding light on how in uence takes place, I show that inuence through communication and the exchange of opinion within small groups of analysts plays a vital role. This mainly applies during a bullish market environment. When markets are bearish, analysts' incentives induce them not to deviate too much from the overall average, such that then observational learning has a greater impact.

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Rational Bias and Herding in Analysts' Recommendations

Cited by 7 publications

References 22 publications

Under weighting of Private Information by Top Analysts

Under weighting of Private Information by Top Analysts

Strategic Coordination in Forecasting. An Experimental Study

Analyst Behaviour: The Geography of Social Interaction

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