The Cost of Speaking in Two Tongues

25 Pages Posted: 20 Jun 2017

See all articles by Jun Wang

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Xing Cunyu

Southwestern University of Finance and Economics (SWUFE)

Dan Yang

Southwestern University of Finance and Economics (SWUFE)

Ge Zhang

William Paterson University - Cotsakos College of Business

Date Written: June 19, 2017

Abstract

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

Suggested Citation

Wang, Jun and Cunyu, Xing and Yang, Dan and Zhang, Ge, The Cost of Speaking in Two Tongues (June 19, 2017). Available at SSRN: https://ssrn.com/abstract=2989382 or http://dx.doi.org/10.2139/ssrn.2989382

Jun Wang

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States

Xing Cunyu (Contact Author)

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Dan Yang

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

Ge Zhang

William Paterson University - Cotsakos College of Business ( email )

1600 Valley Road
Wayne, NJ 07470
United States

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