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Analysts, News, and Intermediaries

Paper Session

Sunday, Jan. 5, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Seaport A
Hosted By: American Finance Association
  • Chair: Eric So, Massachusetts Institute of Technology

Partisan Professionals: Evidence from Credit Rating Analysts

Elisabeth Kempf
,
University of Chicago
Margarita Tsoutsoura
,
Cornell University

Abstract

Partisan perception affects the actions of professionals in the financial sector. Using a novel dataset linking credit rating analysts to party affiliations from voter records, we show that analysts who are not affiliated with the U.S. president's party downward-adjust corporate credit ratings more frequently. By comparing analysts with different party affiliations covering the same firm in the same quarter, we ensure that differences in firm fundamentals cannot explain the results. We also find a sharp divergence in the rating actions of Democratic and Republican analysts around the 2016 presidential election. Our results show analysts' partisan perception affects firms' cost of capital and investment policies.

Fake News: Evidence from Financial Markets

Shimon Kogan
,
Massachusetts Institute of Technology
Tobias Moskowitz
,
Yale University
Marina Niessner
,
AQR Capital Management

Abstract

We examine fake news in financial markets, a laboratory that offers an opportunity to quantify its direct and indirect effects. We study three experimental settings. The first is a unique dataset of unambiguous fake articles on financial news platforms prosecuted by the Securities and Exchange Commission. The second applies a linguistic algorithm to detect deception in expression on the universe of articles on these platforms, using the first sample as a validation and calibration set. The third is an event study exploiting the SEC investigation as a public shock to investor awareness of fake news. We find that fake news increases trading activity and price volatility relative to non-fake news for the equity securities of firms mentioned in the articles. Following public revelation of the existence of fake news, we find an immediate decrease in reaction to all news, including legitimate news, on these platforms, consistent with indirect spillover effects of fake news conjectured by theory. These findings are predominant among small firms with high retail ownership, and are stronger for more circulated articles. Our results are consistent with economic theory on media bias and its application to fake news.

Non-Deal Roadshows, Investor Welfare, and Analyst Conflicts of Interest

Daniel Bradley
,
University of South Florida
Russell Jame
,
University of Kentucky
Jared Williams
,
University of South Florida

Abstract

Non-deal roadshows (NDRs) are private meetings between management and institutional investors, typically organized by analysts. We find that around NDRs, local institutional investors trade heavily and profitably, while retail trading is significantly less informative. Analysts who sponsor NDRs issue significantly more optimistic recommendations and target prices, coupled with more “beatable” earnings forecasts, consistent with analysts issuing strategically biased forecasts in order to win NDR business. Our results suggest that NDRs result in wealth transfers from small retail investors to large institutional investors and create significant conflicts of interests for the analysts that organize them.
Discussant(s)
Ville Rantala
,
University of Miami
Anastassia Fedyk
,
University of California-Berkeley
Jay Ritter
,
University of Florida
JEL Classifications
  • G1 - General Financial Markets