Analyst herding and investor protection: a cross-country study

Abstract

Using a multi-national data set, we investigate the herding behaviour of financial analysts. Our results across a range of different countries suggest that analysts consistently deviate from their true forecasts and issue earnings forecasts that are biased by anti-herding. Furthermore, the level of bias (i.e. anti-herding) seems to be systematically higher for forecasts on companies from European countries compared to the US or Japan. We argue that such differences might stem from diverse levels of investor protection and corporate governance as analysts deviate less from true forecasts when the overall information environment is more transparent and company disclosures are of higher quality. Thereby, we proxy investor protection based on the company-level share of institutional ownership as well as on country-level investor protection measures. Our results show that increasing levels of investor protection and corporate governance mitigate the anti-herding behaviour. Especially, when companies that are located in high investor protection countries are held by an increasing number of institutional investors, analysts are most reluctant to issue biased forecasts.

Keywords:

• corporate governance
• analyst herding
• investor protection
• earnings forecasts

JEL Classification:

• G14
• G15
• G18

Notes

¹ See, for example, Trueman (1994), Hong et al. (2000), Clement and Tse (2005) or Jegadeesh and Kim (2010).

² See, for example, Zitzewitz (2001), Bernhardt et al. (2006), Chen and Jiang (2006) or Naujoks et al. (2009).

³ For a more elaborated discussion on the consequences of herding in financial markets, see, for example, De Bondt and Forbes (1999) or Bikhchandani and Sharma (2001).

⁴ For a detailed discussion of problems arising within former studies on herding, see Bernhardt et al. (2006).

⁵ See Commission of the German Corporate Governance Code (2013).

⁶ For further literature on the effect of institutional ownership on the quality of reported earnings, see Shleifer and Vishny (1986), Frankel et al. (2006) or Chen et al. (2007).

⁷ According to the World Bank as per 2012.

⁸ For a more elaborated discussion on the advantages of this methodology, see Bernhardt et al. (2006).

⁹ While Clement and Tse (2005) use a 3-day lag, excluding reports from only the report’s publishing date is consistent with Zitzewitz (2001) and Naujoks et al. (2009).

¹⁰ Including only reports of the last 90 days into the consensus is consistent with Clement and Tse (2005) and Naujoks et al. (2009).