The Cost of Speaking in Two Tongues
25 Pages Posted: 20 Jun 2017
Date Written: June 19, 2017
Malmendier and Shanthikumar (2014) find that some analysts issue relatively higher stock recommendations and relatively lower earnings forecast of the same firm on the same day. They describe this behavior as speaking in two different tongues. In this paper, we explore the cost of this strategy on financial analysts. We show that when analysts employ the two-tongue strategy, they are sacrificing their forecasting accuracy on the target firms. Taking the two-tongue strategy in the previous year helps the analyst’s career in terms of staying in the same firm or avoiding being demoted to a smaller brokerage firm. However, this strategy reduces the analyst’s probability to move to a top ten brokerage house or to be nominated as an All-Star analyst. Finally, investors respond less positively to the higher stock recommendations when analysts issue high recommendation and low earnings forecast at the same time.
Keywords: Analysts, Speaking in Two Tongues, Earnings Forecasts, Recommendations
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