Home Biased Analysts in Emerging Markets

45 Pages Posted: 15 Sep 2005 Last revised: 15 Nov 2013

See all articles by Sandy Lai

Sandy Lai

University of Hong Kong

Melvyn Teo

Singapore Management University - Lee Kong Chian School of Business

Date Written: January 20, 2007

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.

Keywords: home bias, analyst recommendation, optimism, investment banking, emerging market

JEL Classification: G14, G15, G20

Suggested Citation

Lai, Sandy and Teo, Melvyn, Home Biased Analysts in Emerging Markets (January 20, 2007). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=799546

Sandy Lai

University of Hong Kong ( email )

Faculty of Business and Economics
K.K. Leung Building, Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

Melvyn Teo (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

50 Stamford Road
Singapore, 178899
Singapore
+65 6828 0735 (Phone)
+65 6822 0777 (Fax)

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