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Credibility and Cheap Talk of Securities Analysts:Theory and Evidence

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  • Jordi Blanes

Abstract

This paper studies how investors react to public messages that may be optimistically biased. We first construct a communication game between an investor and a (possibly) biased securities analyst. We find an equilibrium characterised by the following properties: first, the investor reacts more to bad news than to good news, and second, the di.erence in this reaction is higher when the investor has a greater prior suspicion that the analyst is a biased type. We then use nonparametric techniques and a large database of earnings forecasts to test these predictions, and find that the evidence supports them. Lastly, we use our empirical strategy to discriminate between the causes for analysts’ bias.

Suggested Citation

  • Jordi Blanes, 2003. "Credibility and Cheap Talk of Securities Analysts:Theory and Evidence," FMG Discussion Papers dp472, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp472
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    File URL: http://www.lse.ac.uk/fmg/workingPapers/discussionPapers/fmgdps/dp472.pdf
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    Cited by:

    1. Mehmet Y. Gurdal & Ayca Ozdogan & Ismail Saglam, 2011. "Truth-Telling and Trust in Sender-Receiver Games with Intervention," Working Papers 1106, TOBB University of Economics and Technology, Department of Economics.
    2. Tobias Gesche, 2016. "De-biasing strategic communication," ECON - Working Papers 216, Department of Economics - University of Zurich, revised Sep 2021.
    3. Stephen Baginski & Elizabeth Demers & Chong Wang & Julia Yu, 2016. "Contemporaneous verification of language: evidence from management earnings forecasts," Review of Accounting Studies, Springer, vol. 21(1), pages 165-197, March.
    4. Kartik, Navin & Ottaviani, Marco & Squintani, Francesco, 2007. "Credulity, lies, and costly talk," Journal of Economic Theory, Elsevier, vol. 134(1), pages 93-116, May.

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