Are Investors Naive About Incentives?
Traditional economic analysis of markets with asymmetric information assumes that uninformed agents account for the incentives of informed agents to distort information. We analyze whether investors in the stock market internalize such incentives. Stock recommendations of security analysts are likely to be biased upwards, particularly if the issuing analyst is affiliated with the underwriter of the recommended stock. Using the NYSE Trades and Quotations database, we find that large (institutional) traders account for the upward bias and exert no abnormal trade reaction to buy recommendations, and significant selling pressure in response to hold recommendations. Small (individual) traders do not account for the upward shift and exert significantly positive pressure for buys and zero pressure for hold recommendations. Moreover, large traders discount positive recommendations from affiliated analysts more than from unaffiliated analysts, while small traders do not distinguish between them. The naive trading behavior of small investors induces negative abnormal portfolio returns.
|Date of creation:||Oct 2004|
|Date of revision:|
|Publication status:||published as Malmendier, Ulrike and Devin Shanthikumar. "Are Small Investors Naïve About Incentives?" Journal of Financial Economics 85, 2 (August 2007): 457-489.|
|Contact details of provider:|| Postal: |
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Marco Ottaviani & Francesco Squintani, 2002. "Non-Fully Strategic Information Transmission," Wallis Working Papers WP29, University of Rochester - Wallis Institute of Political Economy.
- Lee, Charles M C & Ready, Mark J, 1991. " Inferring Trade Direction from Intraday Data," Journal of Finance, American Finance Association, vol. 46(2), pages 733-46, June.
- Lin, Hsiou-wei & McNichols, Maureen F., 1998. "Underwriting relationships, analysts' earnings forecasts and investment recommendations," Journal of Accounting and Economics, Elsevier, vol. 25(1), pages 101-127, February.
- Laibson, David I. & Gabaix, Xavier, 2006.
"Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets,"
4554333, Harvard University Department of Economics.
- Xavier Gabaix & David Laibson, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 121(2), pages 505-540, May.
- Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
- V. Crawford & J. Sobel, 2010.
"Strategic Information Transmission,"
Levine's Working Paper Archive
544, David K. Levine.
- Malmendier, Ulrike M. & Della Vigna, Stefano, 2003.
"Contract Design and Self Control: Theory and Evidence,"
1801, Stanford University, Graduate School of Business.
- Stefano Della Vigna & Ulrike Malmendier, 2004. "Contract Design and Self-control: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 119(2), pages 353-402, May.
- Michaely, Roni & Womack, Kent L, 1999. "Conflict of Interest and the Credibility of Underwriter Analyst Recommendations," Review of Financial Studies, Society for Financial Studies, vol. 12(4), pages 653-86.
- Lee, Charles M. C. & Radhakrishna, Balkrishna, 2000. "Inferring investor behavior: Evidence from TORQ data," Journal of Financial Markets, Elsevier, vol. 3(2), pages 83-111, May.
- Edward L. Glaeser, 2003. "Psychology and the Market," Harvard Institute of Economic Research Working Papers 2023, Harvard - Institute of Economic Research.
- Lee, Charles M. C., 1992. "Earnings news and small traders : An intraday analysis," Journal of Accounting and Economics, Elsevier, vol. 15(2-3), pages 265-302, August.
- Daniel J. Bradley & Bradford D. Jordan & Jay R. Ritter, 2003. "The Quiet Period Goes out with a Bang," Journal of Finance, American Finance Association, vol. 58(1), pages 1-36, 02.
- Odders-White, Elizabeth R., 2000. "On the occurrence and consequences of inaccurate trade classification," Journal of Financial Markets, Elsevier, vol. 3(3), pages 259-286, August.
- Narasimhan Jegadeesh & Joonghyuk Kim & Susan D. Krische & Charles M. C. Lee, 2004. "Analyzing the Analysts: When Do Recommendations Add Value?," Journal of Finance, American Finance Association, vol. 59(3), pages 1083-1124, 06.
- Ulrike Malmendier & Devin Shanthikumar, 2007. "Do Security Analysts Speak in Two Tongues?," NBER Working Papers 13124, National Bureau of Economic Research, Inc.
- Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
- Francis, Jennifer & Douglas Hanna, J. & Philbrick, Donna R., 1997. "Management communications with securities analysts," Journal of Accounting and Economics, Elsevier, vol. 24(3), pages 363-394, December.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:10812. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.