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Multiple Information Sources and Equilibrium in Financial Markets

  • Author(s): Wiedman, Elyashiv David
  • Advisor(s): Trueman, Brett Michael
  • et al.
Abstract

The purpose of the dissertation is to examine the interaction among multiple information sources in financial markets such as among analysts and firm managers and the effect of these interactions on the information available in financial markets.

In the first chapter, analysts of heterogeneous abilities may choose which firm to cover, firms with or without prior coverage, and then issue earnings forecasts. The information an analyst observes depends on his ability and may be correlated with that of other analysts who cover the same firm. It is shown that analysts with career concerns, i.e., who aim to appear well informed, may differ in their coverage decisions. Thus, analyst initiations of coverage provide information about analysts’ abilities. Also, depending on the correlation of analysts’ information and the prevalence of competent analysts, analysts’ reputations are not necessarily monotonic in forecast accuracy, in contrast to the prevalent assumption in the empirical literature. Further, incompetent analysts bias their forecast if their information is not sufficiently precise. It is shown that forecasting bias is more likely when a few analysts cover the same firm than when an analyst initiates exclusive firm coverage.

In the second chapter, the interaction between analysts and firms’ managers is examined. A firm’s manager may be regarding future demand and may disclose it at his discretion. An analyst who covers the firm’s industry observes relevant information and issues a (possibly biased) forecast. Whether the analyst issues a biased or unbiased forecast is unknown to investors, who price the firm based on the available information. It is shown that investors’ beliefs about the manager’s information endowment and the analyst’s forecasting objective are endogenously intertwined. Thus, in addition to the direct role of the analyst’s forecast in providing information, the forecast has an indirect effect by influencing investors’ beliefs regarding the manager’s information endowment. If the analyst’s forecast comes after the manager’s possible disclosure, it is shown that analyst coverage crowds out the manager’s disclosure compared to the case without coverage. If the analyst’s forecast precedes the manager’s disclosure, the manager may disclose his information even when the analyst issues a positively biased forecast.

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