Does Competition Improve Information Quality: Evidence from the Security Analyst Market

Department : Finance

Speaker : Chuqing Jin (TSE)

Room : TBD

Abstract

This paper studies how competition affects the quality of information provided by security
analysts. Security analysts compete to make earnings forecasts and are rewarded for being more
accurate than their peers. This leads them to distort their forecasts to differentiate but also
disciplines them against reporting over-optimistic forecasts. I structurally estimate a contest
model capturing both effects and simulate counterfactual policies changing analysts’ incentives.
I find the disciplinary effect dominates: rewarding relative accuracy reduces analysts’ forecast
errors, but at the cost of increasing forecast noise. It is optimal to have moderate analyst
competition, balancing more aggregate information against intensified distortions.