The Effects of Analyst‐Country Institutions on Biased Research: Evidence from Target Prices

Abstract

Prior research demonstrates that a strong institutional infrastructure in a country moderates self‐serving behavior of market participants. Cross‐country economic activities have increased significantly, presenting a research opportunity to examine the relative influence of local versus foreign institutional infrastructure on individual market participants. We utilize variation in analyst‐country location relative to covered firm location to examine institutional determinants of optimism in analyst research. Focusing on target prices, where persistent optimism is well documented, we find that analysts domiciled in countries with stronger institutional infrastructures exhibit significantly attenuated target price optimism and more value‐relevant target prices. Our results demonstrate the importance of domestic country‐level institutional factors in moderating self‐serving behavior of market participants engaged in cross‐country activities.

Cultural Biases in Equity Analysis

“…I next construct a comprehensive monthly panel data set of analyst target prices from IBES, using the latest target price issued by each analyst. Following the methodology of Bradshaw, Huang, and Tan (2019), I scale each target price by the share price at the beginning of the month and exclude observations for which the target price is above 400% or below 70% of the current stock price (adjusted for currency and split adjustment factors). Given most target prices do not have explicit stopping dates in IBES, I perform the target price analysis using various maximum age limits for target prices.…”

Accuracy of European Stock Target Prices

“…More recent studies on target price focus either on the determinants of target prices (Da et al 2016) or on exploring the possible relationship between their accuracy and a variety of analysts, markets, accounting systems (Bradshaw et al 2019), firm or governance (Cheng et al 2019) characteristics among others, happily ignoring the fact most evidence points to very low accuracy levels.…”

Does foreign exchange risk matter to equity research analysts when forecasting stock prices? Evidence from U.S. firms

“…Bilinski et al (2013) find that analysts with more forecasting experience, following more firms and employed by larger brokerage houses, issue more accurate target prices. Bradshaw et al (2019) and Bilinski et al (2013) both document that country factors affect target price accuracy. Bilinski et al (2013) find that accounting disclosure quality, cultural traits, and IFRS regulations explain differences in target price accuracy across countries while Bradshaw et al (2019) find evidence that strong investor protection and legal enforcement can mitigate analysts' incentives to inflate target prices.…”