Do Security Analysts Speak in Two Tongues?

65 Pages Posted: 27 Jun 2007 Last revised: 15 Aug 2007

See all articles by Ulrike Malmendier

Ulrike Malmendier

University of California, Berkeley - Department of Economics; University of California, Berkeley - Haas School of Business; 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

Date Written: May 2007

Abstract

Why do security analysts issue overly positive recommendations? We propose a novel approach to distinguish strategic motives (e.g., generating small-investor purchases and pleasing management) from nonstrategic motives (genuine overoptimism). We argue that nonstrategic distorters tend to issue both positive recommendations and optimistic forecasts, while strategic distorters "speak in two tongues," issuing overly positive recommendations but less optimistic forecasts. We show that the incidence of strategic distortion is large and systematically related to proxies for incentive misalignment. Our "two-tongues metric" reveals strategic distortion beyond those indicators and provides a new tool for detecting incentives to distort that are hard to identify otherwise.

Suggested Citation

Malmendier, Ulrike and Shanthikumar, Devin M., Do Security Analysts Speak in Two Tongues? (May 2007). NBER Working Paper No. w13124. Available at SSRN: https://ssrn.com/abstract=990952

Ulrike Malmendier (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
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(510) 642-8724 (Phone)
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HOME PAGE: http://www.econ.berkeley.edu/~ulrike/

University of California, Berkeley - Haas School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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Institute for the Study of Labor (IZA)

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HOME PAGE: http://www.iza.org/en/webcontent/personnel/photos/index_html?key=918

Devin M. Shanthikumar

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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