Analyst forecasts : the roles of price impact and reputational ranking.

Abstract

In this dissertation, I develop analytical models to examine how price impact and reputational ranking incentives influence the forecasting behavior of sell-side analysts. First, I analyze the equilibrium behavior of an analyst when he is concerned with maximizing his short-term price impact and long-term reputational value in the market. Second, I discuss how the equilibrium forecasting behavior of an analyst changes in the presence of a second analyst, when each analyst is concerned with maximizing not only his own reputation, but also his relative reputation (i.e., reputational ranking) compared to the other analyst. Two key results emerge : (i) Positive role of short-term price-impact. Short-term price-impact motives, together with reputational concerns, provide better incentives for honest forecasting than reputational concerns or price-impact profits alone; (ii) Convexity of reputational ranking payoff function decreases the information content of analyst forecasts. The greater the ratio of reputational reward for being ranked higher to reputational penalty for being ranked lower is, the lesser the information content of analyst forecasts.