Competition And Bias

The authors attempt to measure the effect of competition on bias in the context of analyst earnings forecasts, which are known to be excessively optimistic due to conflicts of interest. The instrument for competition is mergers of brokerage houses, which result in the firing of analysts because of redundancy and other reasons such as culture clash. They use this decrease in analyst coverage for stocks covered by both merging houses before the merger to measure the causal effect of competition on bias. They find the treatment sample simultaneously experiences a decrease in analyst coverage and an increase in optimism bias the year after the merger relative to a control group of stocks, consistent with competition reducing bias.