Do Security Analysts Speak in Two Tongues?


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 “twotongues metric” reveals strategic distortion beyond those indicators and provides a new tool for detecting incentives to distort that are hard to identify otherwise. (JEL G14, G24, G29, D82, D83)

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@inproceedings{Malmendier2006DoSA, title={Do Security Analysts Speak in Two Tongues?}, author={Ulrike Malmendier and Devin Shanthikumar and Paul Healy and David Hirshleifer and Gerard Hoberg and Jennifer L. Juergens and Charles Tzu-Chi Lee and Pat O’Brien and Tim McCormick and Zoran Ivkovich and Siew Hong Teoh}, year={2006} }