Who Feel Cheated? Analyst Graphic Distortion and Punishment by Investors

Abstract

The literature about sell-side analysts (analysts) is broad. Nonetheless, little research has been done regarding how these sophisticate users of financial information disclosed current and target price in form of graph. More precisely, we try to investigate if analysts are prone to distort the graph information and what would be the likelihood to continue to follow the ‘noisy analyst’ by non-professional investors. We also try to measure what would be the likelihood to continue to invest in the security. We apply Tuffle (1992) Graph Distortion Index (GDI) and notice that analysts are prone to distort graphs. We also applied laboratory experiment to measure the likelihood of non-professional investors to continue to follow the analyst and to continue to invest in the security. We find that investors ‘punish’ the noisy analyst by reducing the likelihood to follow him/her. The non-professional investors also reduce the likelihood to continue to invest in the firm, even if the data provided in terms of numbers are correct. These findings shed new light in the financial literature and by confirming that ‘normal people’ tend to trust by reflexiveness, and are prone to cognitive errors.