Independent and A¢ liated Analysts: Disciplining and Herding

The paper investigates strategic interactions between an independent analyst and an a¢ liated analyst when the analysts’information acquisition and the timing of their recommendations are endogenous. Compared to the independent analyst, the a¢ liated analyst has superior information but faces a con‡ict of interest. I show that the independent analyst’s recommendation, albeit endogenously less informative than the a¢ liated analyst’s, disciplines the a¢ liated analyst’s biased forecasting behavior. Meanwhile, the independent analyst sometimes herds with the a¢ liated analyst in order to improve forecast accuracy. Contrary to conventional wisdom, I show that herding with the a¢ liated analyst may actually motivate the independent analyst to acquire more information upfront, reinforce his ability to discipline the a¢ liated analyst, and bene…t investors. I am greatly indebted to Jonathan Glover for his guidance and encouragement. I am also grateful to Carlos Corona, Zhaoyang Gu, and Pierre Liang for their help. I thank Anil Arya, Anne Beyer, Pingyang Gao, Isa Hafalir, Jack Hughes, Chandra Kanodia, Haresh Sapra, Jack Stecher, Brett Trueman, and workshop participants at Carnegie Mellon University, University of Chicago, University of Minnesota, and UCLA. The paper is also bene…ted from discussions with my fellow Ph.D. students Qihang Lin and Ronghuo Zheng. All errors are my own.