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The Effects of Investors' Information Acquisition On Sell-Side Analysts Forecast Bias

Astaiza-Gómez, José Gabriel (2021): The Effects of Investors' Information Acquisition On Sell-Side Analysts Forecast Bias.

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Abstract

In this research I empirically study the effects of information acquisition by investors or traders on analysts' forecast bias. Based on the theoretical literature on sell-side analysts, I argue that forecast bias is correlated to investors' information gathering in two opposite directions. On the one hand, higher levels of reading activities about individual firms by investors induce analysts to issue more optimistic forecasts if the potential for trading is higher. On the other hand, higher levels of reading activities about individual firms by investors help them identify opportunistic behaviors and thus to discipline analysts. I find that investors' information acquisition is positively related to analysts' optimism when the potential for trading is larger, and negatively related to optimism when investors are more likely to identify inflated forecasts. Together, these results suggest that information acquisition is not only correlated to analysts' optimism but also that its effect does not work trivially and solely in one direction but it activates two different incentives in analysts' decisions.

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