Do Security Analysts Speak in Two Tongues?

June 5, 2014 Leave a comment

Do Security Analysts Speak in Two Tongues?

Ulrike Malmendier

University of California, Berkeley

Devin Shanthikumar

University of California, Irvine

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.

Filed under Investing Process

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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