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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.
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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

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