Do Security Analysts Speak in Two Tongues?

Ulrike Malmendier, Devin Shanthikumar

NBER Working Paper No. 13124
Issued in May 2007, Revised in February 2014
NBER Program(s):Asset Pricing, Corporate Finance

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.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w13124

Published: Ulrike Malmendier & Devin Shanthikumar, 2014. "Do Security Analysts Speak in Two Tongues?," Review of Financial Studies, Society for Financial Studies, vol. 27(5), pages 1287-1322. citation courtesy of

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