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Luca Piras ORCID logo, Olga Denti ORCID logo, Enrico Maria Cervellati ORCID logo


This paper investigates one of the main sources of financial markets’ public information: financial analysts’ reports. We analyze reports on S&P 500 index through a multidisciplinary approach integrating behavioral finance with linguistic analysis to understand how financial phenomena reflect in or are deviated by language, i.e. whether financial and linguistic trends follow the same patterns, boosting each other, or diverge. In the latter, language could conceal financial events, mitigating analysts’ feelings and misleading investors. Therefore, we attempt to identify behavioral biases (mainly represented by cognitive dissonances) present in analysts’ reports. In doing so, we try to understand whether analysts try to hide the perception of negative price-sensitive events or not, eventually anticipating and controlling the market “mood”. This study focuses on how analysts use linguistic strategies in order to minimize their risk of issuing wrong advice. Our preliminary results show reluctance to incorporate negative information in the reports. A slight asymmetry between the use of positive/negative keywords taken into account and the negative/positive trends of the index seems to emerge. In those weeks characterized by the index poor performances, the frequency of keywords with a negative meaning is lower. On the contrary, in the recovering weeks a higher use of keywords with a positive meaning does not clearly appear. A thorough investigation on the market moods and the analysis of the text of the reports enable us to assess if and to what extent analysts have been willing to mitigate pessimism or emphasize confidence. Furthermore, we contribute to the existing literature also proposing a possible analysts’ value function based on the Prospect Theory [Kahneman and Tversky, 1979] where analysts try to maximize the value deriving from enhancing their reputation, taking into account the risks that may cause a reputational loss. This theoretical framework maintains our preliminary findings and supports the idea that analysts are risk-averse when facing reputational gains and risk-seeking in case of potential reputational losses.

Keywords: Financial Markets, Public Information, Behavioral Finance, Analysts, Linguistic Strategies

How to cite this paper: Piras, L., Denti, O., & Cervellati, E. M. (2012). Analyst reluctance in conveying negative information to the market. Journal of Governance and Regulation, 1(4), 7-22.