Cultural Proximity and the Processing of Financial Information
China Academy of Financial Research (CAFR); Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiao Tong University
China Europe International Business School
Indiana University Bloomington - Department of Finance; China Academy of Financial Research (CAFR)
July 14, 2013
This paper examines how a shared cultural background between analysts and firms under coverage affects information asymmetry in financial markets. To disentangle cultural proximity from geographic proximity, we extract a sample of firms publicly traded in the U.S. but headquartered in regions sharing Chinese culture (“Chinese firms”), and identify a group of U.S. analysts of Chinese ethnic origin (“Chinese analysts”). We find that Chinese analysts issue more accurate forecasts about earnings of Chinese firms than non-Chinese analysts. The rise in forecast precision is more pronounced among first-generation Chinese immigrants. Market reaction is stronger if Chinese analysts revise their forecasts upwards or issue favorable recommendations about Chinese firms. Our results indicate that cultural proximity mitigates information asymmetry that adversely affects foreign firms, especially those from emerging markets, and shed light on culture as an important component of human capital.
Number of Pages in PDF File: 59
Keywords: culture, information asymmetry, forecast accuracy, financial analysts
JEL Classification: G14, G24, F65working papers series
Date posted: February 28, 2013 ; Last revised: July 15, 2013
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