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

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.

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Reference

Chuqing Jin, “Does Competition Between Experts Improve Information Quality: Evidence from the Security Analyst Market”, TSE Working Paper, n. 24-1553, July 2024.