NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Are Investors Naive About Incentives?

Ulrike Malmendier, Devin Shanthikumar

NBER Working Paper No. 10812
Issued in October 2004
NBER Program(s):   AP

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.

download in pdf format
   (561 K)

email paper

This paper is available as PDF (561 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w10812

Published: Malmendier, Ulrike and Devin Shanthikumar. "Are Small Investors Naïve About Incentives?" Journal of Financial Economics 85, 2 (August 2007): 457-489.

Users who downloaded this paper also downloaded these:
Malmendier and Shanthikumar w13124 Do Security Analysts Speak in Two Tongues?
Ding, Lehrer, Rosenquist, and Audrain-McGovern w12304 The Impact of Poor Health on Education: New Evidence Using Genetic Markers
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us