Are investors naive about incentives?
By: Ulrike Malmendier, Devin Shanthikumar.
Contributors: Shanthikumar, Devin.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10812; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10812.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Stocks.; Investments.
Description: "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"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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