“Reputation Acquisition of Underwriter Analysts – Theory and Evidence” by Hefei WANG
University of Illinois at Chicago
I study the role of reputation in a multi-stage strategic information transmission game between an analyst and an investor. In the Pareto-Optimal equilibrium of a single-stage game, an unbiased analyst reveals suficiently good information. The greater the underlying uncertainty, the more information she can credibly communicate. In the multi-stage game, (i) the information content of the analysts' messages differs only in the highest category; (ii) both types of analysts will truthfully communicate more information when they have a higher reputation; and (iii) misrepresentation happens more frequently when there is more underlying uncertainty. Empirical implications of the model are tested.