The Effects of Analyst-Country Institutions on Biased Research: Evidence from Target Prices

Abstract

Prior research demonstrates that a strong institutional infrastructure in a country moderates self-serving behavior of market participants. Cross-country economic activities have increased significantly, presenting a research opportunity to examine the relative influence of local versus foreign institutional infrastructure on individual market participants. We utilize variation in analyst-country location relative to covered firm location to examine institutional determinants of optimism in analyst research. Focusing on target prices, where persistent optimism is well documented, we find that analysts domiciled in countries with stronger institutional infrastructures exhibit significantly attenuated target price optimism and more value-relevant target prices. Our results demonstrate the importance of domestic country-level institutional factors in moderating self-serving behavior of market participants engaged in cross-country activities.