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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27859
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| Title: | Competition and Bias |
| Authors: | Kacperczyk, Marcin
Hong, Harrison |
| Issue Date: | 2-Feb-2009 |
| Series/Report no.: | FIN-08-016 |
| Abstract: | We attempt to measure the effect of competition on bias in the context
of analyst earnings forecasts, which are known to be excessively
optimistic due to conflicts of interest. Our instrument for competition
is mergers of brokerage houses, which result in the firing of analysts
because of redundancy (e.g., one of the two oil analysts is let go) and
other reasons such as culture clash. We use this decrease in analyst
coverage for stocks covered by both merging houses before the merger
(the treatment sample) to measure the causal effect of competition on
bias. We find the treatment sample simultaneously experiences a decrease
in analyst coverage and an increase in optimism bias the year after the
merger relative to a control group of stocks, consistent with
competition reducing bias. The implied economic effect from our natural
experiment is significantly larger than estimates from OLS regressions
that do not correct for the endogeneity of coverage. And this effect is
much more significant for stocks with little initial analyst coverage or competition. |
| URI: | http://hdl.handle.net/2451/27859 |
| Appears in Collections: | Finance Working Papers
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