Financial Analysts' Recommendations: An Analysis of Incentives and Market Reaction

We consider a model in which a lobbyist can bribe a reputation-concerned expert in order to affect the policy choice by a decision maker. We show that the conflict of interest may eliminate reputation-based herding and promote truthful communication. If the decision maker seeks advice from one expert, affiliation may only decrease information content. However, in case with two experts, affiliation may lead to better information transmission. If the lobbyist’s preference is biased in the opposite direction to the prior belief, the conflict of interest creates countervailing effect, unlocks the benefits of information aggregation and alleviates experts’ reputation concerns. We show that lobbyism-driven increase in informativeness of communication is feasible if the conflict of interest is mild and the prior about the state is slightly stronger than the expected experts’ quality.