Working Paper: NBER ID: w11697
Authors: Keehong Bae; Ren M. Stulz; Hongping Tan
Abstract: This paper examines whether analysts resident in a country make more precise earnings forecasts for firms in that country than analysts who are not resident in that country. Using a sample of 32 countries, we find that there is an economically and statistically significant analyst local advantage even after controlling for firm and analyst characteristics. The importance of the local advantage is inversely related to the quality of the information provided by firms. In particular, the local advantage is high in countries where earnings are smoothed more, less information is disclosed by firms, and firm idiosyncratic information explains a smaller fraction of stock returns. The local advantage is also negatively related to market participation by foreign investors and by institutions and positively related to holdings by insiders. U.S. investors underweight a country's stocks more in their portfolios if that country has a higher analyst local advantage.
Keywords: analyst forecasts; local advantage; foreign analysts; information asymmetry; home bias
JEL Codes: F30; G11; G14; G24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| local analysts' information access (G14) | forecast precision (C53) |
| quality of information disclosed by firms (L15) | local analyst advantage (R53) |
| local analyst advantage (R53) | average forecast error (C53) |
| earnings transparency (M52) | local analyst advantage (R53) |
| market participation by foreign investors (F23) | local analyst advantage (R53) |
| local analysts' direct interactions with firms (G24) | forecasting precision (C53) |