Cultural biases in equity analysis

Vesa Pursiainen covers this topic in a new paper.  Most concretely:

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.

And here is the 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.

And from the conclusion:

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. 

For the pointer I thank the excellent Samir Varma.


Bias in recommendations, sure. How about outcomes of those recommendations? :-)

Yes... This right here.

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It seems like a near-tautological result: people are biased towards the things they are biased towards.

Who's excellent now, Kevin Lewis?

"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."

So true. Lazy southerners in Europe are just like lazy southerners in America. Why is the south so lazy and the north so industrious?

Protestantism. See a previous post.

Why lazier? Hot climate plus legacy of slavery. See especially Brazil.

Singaporeans live in a hot climate but they smartly invested in air conditioning. Former PM Lee Kuan Yew:

"Air conditioning was a most important invention for us, perhaps one of the signal inventions of history. It changed the nature of civilization by making development possible in the tropics. Without air conditioning you can work only in the cool early-morning hours or at dusk. The first thing I did upon becoming prime minister was to install air conditioners in buildings where the civil service worked. This was key to public efficiency."

Unrecognized (until now) is the changes central heating and air conditioning and mechanized transportation have had on the human wardrobe. In bygone times, especially during the "Little Ice Age" people in the higher latitudes wore more clothes because of the poor performance of heating systems and travel in coaches, unheated ships or on foot. As hegemons, the British, French and Dutch took their warm but scratchy wool suits and silly cravats around the world and spread them to an extent around the business and government class of warmer climes, who apparently felt that dressing like English businessmen made them look like businessmen. It's kind of sad that residents of the tropics adopted the sweaty clothing of the colonialists and even the Russians, Chinese and Japanese dispensed with their traditional garb in favor of that of the commercial invaders.

Now, central heat and air conditioning in buildings and transportation make prior wardrobes obsolete. People spend very little time out of doors. Ties are rapidly disappearing. T-shirts, displaying various allegiances, advertising and attempted humor, are tolerated everywhere but in the most formal settings, as is clothing that was once worn only by the lowest level working folk. These changes aren't entirely a result of haphazard fads. They're a product of man's control of the personal environment through technology.

In bygone times, especially during the "Little Ice Age" people in the higher latitudes wore more clothes because of the poor performance of heating systems and travel in coaches, unheated ships or on foot

Depends on when and where you are. The Romans wore often not much longer than the knee, and the Celts and Vikings often little, when the Arabs in roasting Arabia and Persians wore full robes and trousers.

Almost 99% of households in Singapore have A/C while only about 50% of households in southern Italy have it (and many Italians have a cultural aversion to using it) and a paltry 16% in Brazil.

The mean temperature in Singapore varies from 23-25 °C. It has a tropical rainforest climate

Sicily varies around 15-25°C, with 15°C closer to the average. The mainland is a little cooler. They have dry summers with low relative humidity and a strong wind. The average summer temperature is roughly that of Southern Japan or Beijing.

It's a significant upfront cost for something which varies through the year, isn't needed for a lot of the year, and can be offset at worst by a fan and open windows in the summer.

Does anyone actually pay attention to analyst recommendations when buying stocks anymore?

I do. I don't when buying stocks though, but only when getting mad at the idiocy of them all. That said, people seem to follow recommendations so they do have some kind of self-fulfilling effect in the short term, usable for daytraders.

I agree with this wholeheartedly. Which is why I hate terrorism. It will impact cultural bias and increase nationalism.

Isn't there an element of conflict of interest: an equity analyst will favor companies that do business with the equity analyst's financial firm. And within country companies are much more likely to do business with within country financial firms. Indeed, it's circular: an equity analyst recommends a company's stock; the price of the company's stock goes up; the company decides to issue more stock at the higher price; the company picks the equity analyst's financial firm as underwriter for the offering. Contrary to those who worship at the altar of markets, financial markets are swamps.

I wonder if theres like a price checker, or if intel does just grabs everyones trading algorithms to see who is biased towards what or generic these guys are x those guys are y etc, seems like a dnc intel thing they would definitely get in between trading software and the markets, so would the gop intel, but the dnc intel would do it to use it as opposed to it being like a martial law function for the gop. the dnc would use it to crash intentionally, everything the left does is dependent on breaking the west so then everyone wants more money from the state

the behavior satellites are different and they can just force people to do xyz while just getting the general nature of the institution, they don't really need the software but they can get a employee to steal it and send it to anyone, and force the employee to think its anyone, and every internet connection is already instantly hackable by the state so the govt could easily just grab any information,

anyway did you gees see happening? when everyone was killing themselves a invisible thing, spirit? no complete and total satellite puppeteering can simulate any real emotion feeling drug induced or natural, anyway

yes the rangers thing was real, the Netflix movie was really good, the south americans (Jonestown Colombia and the 2005 suicide are the same as kennedys exploding head turning into the ne usa), same Honolulu ring too. ghandi ww1 Ferdinand jfk and Jonestown were all Honolulu, the guy moneyshot himself and then the cat had 8 lives. it burns burns burns the Honolulu ring, Japanese finally pointed that out to me, nobody else said anything

the Netflix movie was I had the dollar earned the eu and euro and then somebody was fighting over the peso, in latin America the currency human and cash capital all revolves around the pes, pez, candy, drugas, peso, anyway I don't know why they came back to shoot that guy in the Netflix movie, that epstien obl guy wasn't killed by the dnc or gop but when he started attacking mexico they got it done, don't underestimate the latin americans, you'll have to leave the underground and intel fields forever unless you have a dedicated team if you break the unwritten rules, anyway me and Elizabeth taylor were holed up in that house in alb and the walls kept getting blasted with whacks of energy, some energy manipulates your body mind or sometimes its tics, narcotics etc, but those whacks kept hitting the wall over and over, the latin americans and africans and African americans did really well with the new rich asia, collectively rich, anyway that's how America lost from 2016 to 2018 before America won again,

anyway the latin americans are good people, they don't hate America not even arpaio, they come to work and live and are like the rest of us, a little bit indian and European, I can basically beat the entire west with my latin American ring since the gay marriage and euro

anyway, lets get rid of the 14th amendment and then let each state set a limit on how many work visas to give above a mandated federal minimum with a central America eurozone, south American eurozone and everyone can travel freely

birdbox was the 810 address, king juan tabo, Albuquerque is a giant pacman grid and the air force and nuclear weapons field has it lined up for a nuclear winter tron hellboy Constantine hellworld for the state drawing lines in the sand

birdbox was at 810 Netflix drug money in the walls was at fruit, whats the Affleck head shot about? oh right killing the guy in the field, that's in sicario movie too, they tried to make hosni (or elvis) Obama and then kill them both at the same time a Taiwan ty won game of tying things onto people and then trying to kill them at the same time, a nuclear weapons field trick like intermittent electrical problem like hitting the tv or tapping on a car starter, so the me not trying to kill hosni thing, anyway elvis wasn't a bad guy, was the sha half of Reagan and the eddies part of the kennedys, the kens and eddys, the kennedys are just a one of the many kennedys around the world of the brothers meat puppets

anyway the afflack getting shot after killing the guy, nobody shot, and then all the world leaders shot and then all the world leaders fell into the Kaiser soze trap, anyway bad times but the economy came back

cloak and dagger 84, one red shoe, forest gump, netlifx drug movie, Netflix bird box movie, my friend and I from mexico made a wooden box in drafting class in high school, anyway those white immigration hawks would love central Americas soil and way of life

im glad everyone got paid and now I can finally work

tylers airspace looks right again, at least he wasn't given autism

no really check out the seahawks paint at the new auto shop at wasington and lomas

thanks, im glad trons finally over, cedric benson and kobe both died in tron, remember tron came out during the 80s cold war nuclear winter thing and then again and I was stuck in Albuquerque playing games, weird I was marv but I still had to do all the work, not a face for the screen so that actor got it

think of nuclear weapons as microwaves nudging you to behave, a god of the machine, and the frog in the pan, the state slowly burns you until bam Honolulu etc, its very I dream of genie with locker room idiocy built into it, wall e weather, sept 11 was a Honolulu hell boys Honolulu, anyway a giant counterintel maze to cover 44 years after civil rights law 44th president is black, a bunch of us get killed fighting each other in who did sept 11 and whos obl while the black guy and usa live basically fine, better than us idiot gladiators

right nuclear winter tron and cold war games, both involved Russia but this time Russia is capitalist and America is in a losing 2 birds Chinese state capitalism (communism) trap

funny vlad won, corruption (Russia) is fixable communism (usa) has to fail unless your china

So when a Norwegian analyst says to buy a Austrian stock, or a French analyst says buy British, you buy.

I've been doing international portfolio management for over 25 years.
1) most sell side ratings aren't taken particularly seriously by either the sell side analysts or their clients.
2) ratings are likely to be more positive when investment banking relationships are involved, or if the sell side analyst intends to host the company management on roadshows or at conferences. Few pay attention to French analysts. There are very few Norwegian sell side analysts because there are not so many nordic stocks. In such a small world they may feel they should be nice to their few contacts.

It's just such a dumb topic to see overanalyzed by someone who probably has never worked on the buy side or sell side or made meaningful investments. If there was profit from this knowledge I dare him to trade on it.

I find it a bit worrying how many analyst-firm pairs there were (225) compared to the relatively low p value and several pairing with low numbers of observations. To the author's credit, the discussed pairings are much better powered than the average pairing, but it does feel like there might be some p hacking going on here.

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