Abstract
We examine an analyst's sale and distribution of information related to short-term price movements, but unrelated to underlying firm value. By selling non-fundamental information, the analyst increases competition on the signal, but prices become more sensitive to net order flow, creating an offsetting increase in the non-fundamental signal's value. More precise non-fundamental information is more widely distributed. In the limit, a perfect non-fundamental signal will be publicly disclosed for an arbitrarily small fee, and the analyst earns profits as if he possessed fundamental information. Consistent with empirical findings, analysts' recommendations can be profitable, even when widely distributed or seemingly inconsistent with detailed forecasts. Analysis based on non-fundamental information does not contribute to greater price efficiency, but reduces liquidity costs. In a multi-period setting, traders with non-fundamental information do not front run, preferring to transact only in the period in which uninformed demand is executed.