Strategic Complementarities between Security Analyst Information, Security Companies, and Investor

Abstract

In this paper, we study how investors react to security analyst reports. Security companies earn profits by increasing investment volume in the stock market. They manipulate analyst reports through their security analysts and provide information to induce investors to buy stocks. The question is how do investors who know this fact react to such reports? We build a model of investor activity by assuming complementarity among investors who buy a stock. In other words, if an investor buys a stock when its stock price is believed to be high, this purchase induces other investors to buy, which results in increases the stock price. The first investor believes his or her belief to be correct. Based upon this complementarity in the stock market, we use the supermodular game and monotone comparative statics of Milgrom and Roberts (1990a). Then, we study the investment volumes, stock prices, and manipulation ratios of security companies, with the following findings. First, the security company always manipulates analyst reports for expected gains. Therefore, true information is not provided to the market, in which case the investment volume is lower than that in the first best case under perfect information. However, as analyst report precision increases, security companies relax their level of manipulation, although they easily manipulate analyst reports if the analyst precisely forecast the company profit. Under certain circumstances, manipulation leads to higher stock prices and stimulates company production, compared with the first best case. In this paper, we show that complementarity among investors explains the structure of the market, investor behavior, and company production levels in a bull market.