The Effect of Trading Volume on Analysts’ Forecast Bias

• DOI: 10.2308/accr.00000030
• Publication Date: 2010-12-10T23:01:57Z
• Authors: Anne Beyer; Ilan Guttman
• Keywords: Private information retrieval; Stochastic game; Trading strategy

ABSTRACT: This study models the interaction between a sell-side analyst and risk-averse investors. It derives an analyst’s optimal earnings forecast investors’ trading decisions in setting where payoff depends on volume generates as well error. In fully separating equilibrium, we find that biases upward (downward) if his private signal reveals relatively good (bad) news. The model predicts that: (1) more often than downward is average optimistic; (2) magnitude of bias increasing per-share benefit from he receives; (3) expected squared error may increase precision information. Finally, characterize circumstances under which (rational) acts overweights or underweights