An Analysis of Stock Recommendations
Volume: Volume 34, No. 1
Issue: Spring 2003
Pages: pp. 183-203
Authors: John Morgan and Phillip C. Stocken
Title: An Analysis of Stock Recommendations
Abstract: We study the information content of stock reports when investors are uncertain about a financial analyst's incentives. Incentives may be aligned, in which case the analyst wishes to credibly convey information, or incentives may be misaligned. We find the following: Any investor uncertainty about incentives makes full revelation of information impossible. Categorical ranking systems, such as those commonly used by brokerages, arise endogenously as equilibria. Under certain conditions, analysts with aligned incentives can credibly convey unfavorable information but can never credibly convey favorable information. Finally, we compare testable implications of the model to empirical properties of stock recommendations.