The Impact of Trading Commission Incentives on Analysts' Stock Coverage Decisions and Earnings Forecasts

In this paper, I consider how security analysts' incentives to generate trading commissions affect the accuracy and availability of their reports. I model the interaction between an analyst and an investor who holds an initial endowment of a risky asset and must pay a commission to a brokerage firm in order to buy or sell shares of the asset. The investor bases his decision on information provided by the analyst, who is in turn employed by the brokerage. The analyst's decision about how much information to gather about the asset is driven by his expectations of the commissions to be generated from that information. I find that the analyst's incentives to gather information are strongest for stocks that are expected to perform well; consequently, reports (i.e., forecasts) for these stocks are likely to be more accurate than forecasts