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Analysts' Disagreement and Investor Decisions

Author

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  • Gick, Wolfgang

    (Research Institute of Industrial Economics (IFN))

  • Weissensteiner, Alex

    (School of Economics and Management)

Abstract

Earning forecasts disclosed by financial analysts are known to be overly optimistic. Since an investor relies on their expertise, the question arises whether he would take analyst recommendations at face value or instead structure consultation with differently upward-biased analysts in a way that would permit him to make more accurate investment decisions. We characterize disagreement in a strategic disclosure game where two analysts disclose to an investor who has commitment power. This setup delivers an explanation of why “de-biasing" occurs naturally when disagreement carries through the disclosure process itself. Our results suggest that consulting more than one analyst permits the investor to make more accurate decisions, even if both analysts overstate their recommendations. We generalize our findings to the case of noisy observation.

Suggested Citation

  • Gick, Wolfgang & Weissensteiner, Alex, 2018. "Analysts' Disagreement and Investor Decisions," Working Paper Series 1207, Research Institute of Industrial Economics.
    • Handle: RePEc:hhs:iuiwop:1207
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    More about this item

    Keywords

    Strategic Information Transmission; Disagreement; Upward-biased Experts; Commitment Power; Noisy Observation;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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