A Theory of Reputation Acquisition of Stock Analysts

Abstract

I study the role of reputation in a multi-stage strategic information transmission game between an analyst and an investor. Absent reputation concerns, a biased analyst does not communicate any information in equilibrium. The unbiased analyst can credibly reveal all but sufficiently good information. In the multi-stage game, (i) when a biased analyst misrepresents her information, she will elevate a set of the worst stocks to the strongest recommendation; (ii) both types of analysts will misrepresent less frequently when they have a higher reputation; and (iii) misrepresentation happens more frequently when there is more market uncertainty.