Abstract

http://ssrn.com/abstract=686190
 
 

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Do Security Analysts Speak in Two Tongues?


Ulrike Malmendier


University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); Institute for the Study of Labor (IZA)

Devin M. Shanthikumar


University of California, Irvine - Paul Merage School of Business

March 2005

AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper

Abstract:     
Why do analysts display overoptimism about the stocks they cover? According to the selection hypothesis, analysts are truly too optimistic about the stocks they choose to cover. According to the conflict-of-interest hypothesis, analysts choose to distort their view to maximize profits via commissions and underwriting business, in particular if affiliated with an underwriting bank. We analyze the concurrent issuance of recommendations and earnings forecasts to differentiate between these two hypotheses. The selection hypothesis implies a positive correlation between overoptimism in recommendations and in forecasts. Under the conflict-of-interest hypothesis, analysts may choose to distort recommendations but to prove their analyst quality in their forecasts, which are directed towards more sophisticated, institutional investors. We find that, while affiliated analysts' recommendations are more optimistic than unaffiliated recommendations, affiliated analysts' earnings forecasts are more pessimistic than unaffiliated forecasts. Similar discrepancies between the timing and persistence of recommendations and forecasts confirm this interpretation. Additional results on trading reactions indicate that small traders react indeed more strongly to recommendations, while large traders discount recommendations and react more strongly to analyst earnings forecasts.

Number of Pages in PDF File: 43

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Date posted: October 3, 2005  

Suggested Citation

Malmendier, Ulrike and Shanthikumar, Devin M., Do Security Analysts Speak in Two Tongues? (March 2005). AAA 2006 Financial Accounting and Reporting Section (FARS) Meeting Paper. Available at SSRN: http://ssrn.com/abstract=686190 or http://dx.doi.org/10.2139/ssrn.686190

Contact Information

Ulrike Malmendier
University of California, Berkeley - Department of Economics ( email )
549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
(510) 642-8724 (Phone)
(510) 642-6615 (Fax)
HOME PAGE: http://www.econ.berkeley.edu/~ulrike/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=918
Devin M. Shanthikumar (Contact Author)
University of California, Irvine - Paul Merage School of Business ( email )
Paul Merage School of Business
SB 440
Irvine, CA 92697-3125
United States
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