Source:“CulturalBiasesinEquityAnalysis”,byV.Pursiainen, 2020
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homecountryofcompanybeingrated→Analyststendnottorecommendsharesoffirms
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aftercountriestheyarebiasedagainst02040Stockrecommendationprobability60%-20 0 20 40BuySellTrustbias,%ptsTrustbias,%pts405030Buyrecommendationprobability60%-20 0 20 40Countrynot
inname
Countryin
companynameEquityanalystsarelesslikelytorecommendstocksfromcountriestheirnationisbiasedagainstGreecePortugalSpainItalyFranceAustriaBelgiumGermanyNetherlandsIrelandBritainDenmarkSwedenNorwayFinlandGreecePortugalSpainItaly
FranceAustriaBelgiumNetherlandsGermanyIrelandDenmarkBritainSwedenNorwayNorthernEuropeans
disproportionatelydistrust
southernEuropeans.Thesame
is truetheotherwayaroundFinlandTrustbiases*betweenEuropeannations
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disproportionately
trustIreland.TheIrish
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...trustpeoplefrom
thesecountries*TheEconomistFebruary 15th 2020 77T
he “sell-side” equity analysts who
work for investment banks are often ac-
cused of being less than completely objec-
tive. Because they need to maintain close
ties with the companies they cover, they
may be too eager to accept managers’ rosy
earnings projections. They might also feel
pressure to talk up a firm’s prospects be-
cause their banks stand to profit from un-
derwriting fees. But professional and eco-
nomic incentives are not the only possible
sources of bias. A new working paper by
Vesa Pursiainen of the University of Hong
Kong argues that sell-side analysts are also
swayed by national prejudices.
The study makes use of a survey con-
ducted by Eurobarometer, which asked res-
idents of 15 European countries how much
they thought people of particular national-
ities could be trusted. Unsurprisingly, peo-
ple said they had the most faith in their
compatriots. The data also reveal that bilat-eral trust varies greatly by region. Whereas
most Europeans polled tend to see those
from the north of the continent as more
trustworthy, southern Europeans stand
out by considering their fellow Mediterra-
neans to be the most reliable.
By comparing these levels of bilateral
trust across countries, Mr Pursiainen de-
veloped a measure of “trust bias”. Finns, for
example, show a trust bias against Italians.
They do not merely distrust Italians more
than they distrust other nations (a view
shared by many) but distrust them more
than other Europeans do.
Mr Pursiainen then matched these
numbers with a database of 1.3m sell-side
recommendations issued between 1996
and 2018. He concludes that trust bias is a
good predictor of how analysts rate partic-
ular stocks. Eurobarometer’s data show
that Norwegians are disproportionately
likely to trust people from Denmark and
Britain. Accordingly, Mr Pursiainen finds
that Norwegian analysts, as identified by
their surnames, are 8.4 percentage points
more likely to recommend Danish stocks
than Austrian analysts are, and 6.7 percent-
age points more likely to recommend Brit-
ish firms than French analysts are. This ef-
fect seems to be especially strong in the
cases of companies whose names containthe names of their home countries (such as
Deutsche Bank).
In theory, such a pattern might arise be-
cause analysts tend to be better informed
about firms based in nearby countries. Yet
the study finds that even after accounting
for distance, trust bias still seems to influ-
ence analysts’ opinions on shares.
The power of trust bias appears to be
strongest in times of political or economic
turmoil. During the euro zone’s sovereign-
debt squeeze in 2011-13, analysts from
northern Europe became far more bearish
on southern European stocks than their
Mediterranean peers were. Ever since their
country voted to leave the eu, British an-
alysts have become much more optimistic
about domestic firms’ prospects, relative to
analysts from the continent.
It is unclear whether analysts are aware
of the bias in their recommendations. They
may think that a firm’s nationality does not
affect their judgment, or that they are cor-
rectly accounting for the context in which a
company operates. Alternatively, they
might be pandering to their audience. As
Greece defaulted on bonds held in spades
by German entities, it would have taken a
brave German analyst to endorse Greek
shares. In any case, it is another reason to
be cautious about sell-side analysis. 7Analysts’ stock recommendations are
coloured by their cultural biasesPrice and prejudice
Graphic detailBehavioural finance