What Do Analysts Do ? Investor Decision and the Analyst Remuneration Mode
نویسنده
چکیده
This paper questions the interaction between security analysts and institutional investors. We focus particularly on the role of analyst remuneration mode in investor decision. To do so, we propose a model in which the investor decides to trade or not to trade regarding the analyst recommendation. First, with a commission-based salary, the analyst is interested in the volume of transactions. This leads to a conßict of interest, as he might sometimes issue untruthful recommendations, which the investor is likely to follow, in some cases that we precise. We Þnd that the investors risk perception is lowered when the analyst credibility increases. Second, with a remuneration mode inciting the analyst to recommend truthfully, the conßict of interest disappears. In this case, the investor probability to trade is higher, compared with the commission-based remuneration mode. Stock market analysts are sometimes accused of making conspicuous errors in their recommendations. Many studies Þnd an explanation in their irrationality. Because of psychological bias or of some characteristics of information distribution, they would be unable to perfectly allocate the resources on the market, and as such they would be imperfect intermediaries. We would like to emphasize, besides this
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