Hostname: page-component-78c5997874-94fs2 Total loading time: 0 Render date: 2024-11-15T05:34:14.623Z Has data issue: false hasContentIssue false
  • English
  • Français

Home-Biased Analysts in Emerging Markets

Published online by Cambridge University Press:  06 April 2009

Sandy Lai  and
Melvyn Teo
Sandy Lai
Affiliation:
sandylai@smu.edu.sg, Lee Kong Chian School of Business, Singapore Management University, 50 Stamford Road, #04–01, S(178899), Singapore.
Melvyn Teo
Affiliation:
melvynteo@smu.edu.sg, Lee Kong Chian School of Business, Singapore Management University, 50 Stamford Road, #04–01, S(178899), Singapore.
Get access Rights & Permissions [Opens in a new window]

Abstract

We find that local analyst recommendations are systematically more optimistic than foreign analyst recommendations in emerging markets. The effects of this novel “home bias” among local analysts overwhelm any information asymmetry between foreign and local analysts. Consequently, local analyst upgrades underperform foreign analyst upgrades, while local analyst downgrades outperform foreign analyst downgrades. Neither foreign investors, local institutions, nor retail investors appear to be fully cognizant of this bias. Trade reactions suggest that foreign investors overestimate the bias in foreign analyst recommendations while local institutions underestimate the bias in local analyst recommendations. These results are pervasive across countries, time periods, and stock groupings, and can be traced to investment banking pressure.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 43 , Issue 3 , September 2008 , pp. 685 - 716
Copyright
Copyright © School of Business Administration, University of Washington 2008

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Bacmann, J. F., and Bolliger, G.. Who Are The Best? Local Versus Foreign Analysts on the Latin American Stock Markets.” Working Paper, University of Neuchatel (2006).Google Scholar
Bae, K. H.; Stulz, R. M.; and Tan, H.. “Do Local Analysts Know More? A Cross-Country Study of the Performance of Local Analysts and Foreign Analysts.” Working Paper, Ohio State University (2006).Google Scholar
Bailey, W.; Kumar, A.; and Ng, D.. “Venturing Abroad: Foreign Investments of U.S. Individual Investors.” Working Paper, Cornell University (2006).Google Scholar
Barber, B.; Lee, Y. T.; Liu, Y. J.; and Odean, T.. “Who Loses from Trade? Evidence from Taiwan.” Working Paper, University of California at Berkeley (2006).Google Scholar
Barber, B.; Lehavy, R.; McNichols, M.; and Trueman, B.. “Can Investors Profit from the Prophets? Security Analyst Recommendations and Stock Returns.” Journal of Finance, 56 (2001), 531–563.CrossRefGoogle Scholar
Barber, B.; Lehavy, R.; McNichols, M.; and Trueman, B.. “Buys, Holds, and Sells: The Distribution of Investment Banks' Stock Ratings and the Implications for the Profitability of Analysts' Recommendations.” Journal of Accounting and Economics, 41 (2006), 87–117.CrossRefGoogle Scholar
Barber, B.; Lehavy, R.; and Trueman, B.. “Comparing the Stock Recommendation Performance of Investment Banks and Independent Research Firms.” Journal of Financial Economics, 85 (2007), 490–517.CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chang, C. “Information Footholds: Expatriate Analysts in an Emerging Market.” Working Paper, University of California at Berkeley (2006).Google Scholar
Choe, H.; Kho, B. C.; and Stulz, R. M.. “Do Domestic Investors Have an Edge? The Trading Experience of Foreign Investors in Korea.” Review of Financial Studies, 18 (2005), 795–829.CrossRefGoogle Scholar
Cooper, I., and Kaplanis, E.. “Home Bias in Equity Portfolios, Inflation Hedging, and International Capital Market Equilibrium.” Review of Financial Studies, 7 (1994), 45–60.CrossRefGoogle Scholar
Dvorak, T. “Do Domestic Investors have an Information Advantage? Evidence from Indonesia.” Journal of Finance, 60 (2005), 817–839.CrossRefGoogle Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fama, E., and French, K.. “Value Versus Growth: The International Evidence.” Journal of Finance, 53 (1998), 1975–1999.CrossRefGoogle Scholar
French, K., and Poterba, J.. “Investor Diversification and International Equity Markets.” American Economic Review, 81 (1991), 222–226.Google Scholar
Froot, K.; O'Connell, P. G. J.; and Seasholes, M.. “The Portfolio Flows of International Investors.” Journal of Financial Economics, 59 (2001), 151–193.CrossRefGoogle Scholar
Grinblatt, M., and Keloharju, M.. “The Investment Behavior and Performance of Various Investor Types: A Study of Finland's Unique Data Set.” Journal of Financial Economics, 55 (2000), 43–67.CrossRefGoogle Scholar
Hau, H. “Location Matters: An Examination of Trading Profits.” Journal of Finance, 56 (2001), 1959–1983.CrossRefGoogle Scholar
Irvine, P.; Lipson, M.; and Puckett, A.. “Tipping.” Review of Financial Studies, 20 (2006), 741–768.CrossRefGoogle Scholar
Jackson, A. R. “Trade Generation, Reputation, and Sell-Side Analysts.” Journal of Finance, 60 (2005), 673–717.CrossRefGoogle Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48 (1993), 65–91.CrossRefGoogle Scholar
Kahneman, D., and Lovallo, D.. “Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking.” Management Science, 39 (1993), 17–31.CrossRefGoogle Scholar
Lin, H. W., and McNichols, M. F.. “Underwriting Relationships, Analysts' Earnings Forecasts and Investment Recommendations.” Journal of Accounting and Economics, 25 (1998), 101–127.CrossRefGoogle Scholar
Ljungqvist, A.; Marston, F.; Starks, L. T.; Wei, K. D.; and Yan, H.. “Conflicts of Interest in Sell-Side Research and the Moderating Role of Institutional Investors.” Journal of Financial Economics, 85 (2007), 420–456.CrossRefGoogle Scholar
Loughran, T., and Ritter, J.. “Uniformly Least Powerful Tests of Market Efficiency.” Journal of Financial Economics, 55 (2000), 361–389.CrossRefGoogle Scholar
Malloy, C. J. “The Geography of Equity Analysis.” Journal of Finance, 60 (2005), 719–755.CrossRefGoogle Scholar
Malmendier, U., and Shanthikumar, D.. “Are Investors Naïve about Incentives?” Working Paper No. 10812, NBER (2006).Google Scholar
McNichols, M., and O'Brien, P.. “Self-Selection and Analyst Coverage.” Journal of Accounting Research, 35 (1997), 167–199.CrossRefGoogle Scholar
Michaely, R., and Womack, K. L.. “Conflict of Interest and the Credibility of Underwriter Analyst Recommendations.” Review of Financial Studies, 12 (1999), 653–686.CrossRefGoogle Scholar
Michaely, R., and Womack, K. L.. “Brokerage Recommendations, Stylized Characteristics, Market Responses, and Biases.” In Advances in Behavioral Finance, Vol. II, Thaler, R., ed. Princeton, NJ: Princeton University Press (2005).Google Scholar
Mitchell, M., and Stafford, E.. “Managerial Decisions and Long-Term Stock Price Performance.” Journal of Business, 73 (2000), 287–329.CrossRefGoogle Scholar
Orpurt, S. “Local Analyst Earnings Forecast Advantage in Europe.” Working Paper, University of Chicago (2006).Google Scholar
Richards, A. “Big Fish in Small Ponds: The Trading Behavior and Price Impact of Foreign Investors in Asian Emerging Markets.” Journal of Financial and Quantitative Analysis, 40 (2005), 1–27.CrossRefGoogle Scholar
Seasholes, M. “Reexamining Information Asymmetries in Emerging Markets.” Working Paper, University of California at Berkeley (2006).Google Scholar
Stickel, S. E. “Reputation and Performance among Security Analysts.” Journal of Finance, 47 (1992), 1811–1836.CrossRefGoogle Scholar
Tesar, L., and Werner, I.. “Home Bias and High Turnover.” Journal of International Money and Finance, 14 (1995), 467–492.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.CrossRefGoogle Scholar
Womack, K. L. “Do Brokerage Analysts' Recommendations Have Investment Value?” Journal of Finance, 51 (1996), 137–167.CrossRefGoogle Scholar