National Culture and Analysts’ Forecasting Behavior

Abstract

We examine whether national culture, in particular, its individualism/collectivism dimension, affects sell-side financial analysts’ forecasting behavior. We find that analysts from individualistic cultures are more likely to issue bold earnings forecasts and stock recommendations than analysts from collectivistic cultures. These results are related to individualistic (collectivistic) analysts’ inclination to over-weight (under-weight) their private information in forming forecasts. The culture’s effect is not permanent: Although slowly, it does decay over time. For market consequences, short-window market reactions are stronger to bold reports by collectivistic analysts than to those by individualistic analysts. For longer-term effects, we find that higher individualism of the covering analysts is associated with lower stock price synchronicity, indicating proportionately more firm-specific information impounded in the stock price. In net, however, we find that individualistic and collectivistic analysts appear to be equally effective in mitigating firms’ information asymmetry.