A Norwegian analyst is 8.4 %-points more likely to assign a buy rating to a Danish firm than an Austrian analyst; & is 6.7 % points more likely to assign a buy rating to a British firm than a French analyst

Pursiainen, Vesa, Cultural Biases in Equity Analysis (October 21, 2019). SSRN: http://dx.doi.org/10.2139/ssrn.3153900

Abstract: A more positive cultural trust bias by an equity analyst's country of origin toward a firm's headquarter country is associated with significantly more positive stock recommendations, controlling for analyst-month and firm-month fixed effects. The cultural bias effect is stronger for eponymous firms whose names mention their home country. The bias effect varies over time, increasing with negative sentiment. I find evidence of a negative North-South bias emerging during the European debt crisis, a UK-Europe divergence amid Brexit, and a Franco-British bias during the Iraq war. The share price reaction to buy recommendations by more positively biased analysts is weaker.

Keywords: cultural bias, trust, analyst recommendation, salience, sentiment
JEL Classification: A13, G02, G20, G24, D83

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My estimates suggest that a Norwegian analyst is 8.4 %-points more likely to assign a buy rating to a Danish firm than an Austrian analyst. Similarly, a Norwegian analyst is 6.7 %-points more likely to assign a buy-recommendation to a British firm than a French analyst.

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This paper provides evidence that cultural biases have a significant effect on equity analysts’ stock recommendations. I further find that there is substantial time variation in the effect of such biases, and that the strength of the bias effect is highly correlated with the general sentiment. In other words, bad economic times, when the level of pessimism is high and con- sumer confidence low, are also the times when cultural biases have the largest effect. These findings are all the more significant since equity analysts are financial market professionals that are often supposed to be less susceptible to behavioral biases than non-professionals. To the extent that these results generalize to the rest of the population, they suggest a link between times of economic hardship and increased cultural biases. This might contribute to the rise of nationalism and populism during economic downturns.

My finding that the salience of the firm’s nationality affects the strength of analysts’ cultural biases is also novel in the finance literature. While there is a vast literature on priming effects in psychology literature and, to a lesser extent, in experimental economics, my results suggest that there might be interesting new applications in financial markets and in non-experimental settings that have not been fully explored.

Finally, I find evidence that significant political events can introduce new cultural biases that are strong enough to affect stock recommendations. The much-discussed North-South divide in Europe and the stereotypes of lazy Mediterraneans invoked during the European debt crisis created a clearly visible negative bias in the stock recommendations of North European analysts on South European companies. Similarly, the diplomatic rifts between the UK and the rest of Europe amid the Brexit process, as well as between France and the UK over the Iraq war can be seen in analyst stock recommendations.