Friday, Jan. 6, 2017 1:00 PM – 3:00 PM
- Chair: Ing-Haw Cheng, Dartmouth College
The Job Rating Game: The Effects of Revolving Doors on Analyst Incentives
AbstractInvestment banks frequently hire credit analysts from rating agencies. A widely held view is that this "revolving door" undermines analysts' incentives to issue accurate ratings. Using a hand-collected dataset of the performance and career paths of 245 credit rating analysts between 2000 and 2009, I show that the ratings by analysts who eventually move to investment banks are on average more accurate than the ratings by other analysts who rate similar securities at the same point in time. A notable exception is the small fraction of securities underwritten by their future employers, where revolving analysts do not outperform. Overall, my findings suggest that the revolving door may, on average, strengthen rather than distort analysts' incentives to issue accurate ratings.
Speed and Expertise in Stock Picking: Older, Slower, and Wiser?
AbstractWe document significant differences among sell-side security analysts in how frequently they change their minds in making stock recommendations and find that this characteristic strongly predicts their recommendations’ value. Analysts who revise their decisions more slowly make more influential recommendations and generate better portfolio returns than those who do not. We find that slower-revising analysts issue more timely recommendation changes and are less likely to herd on the consensus. Their decision speed-style is associated with positive career outcomes; they are more likely to attain the prestigious All-star status and have career longevity. Further, we find a strong tendency for analysts to change their recommendations more slowly throughout their career. While analysts’ decision-speed style and their career tenure correlate, the former is the only characteristic that robustly predicts their recommendations’ value. We link our findings to the role that reputation and experience play in individual decision making and support the notion that a deliberate, slower-decision style trumps a “beat the crowd” mentality.
- G1 - Asset Markets and Pricing