Societal Trust and the Informativeness of Analyst Research
45 Pages Posted: 11 Jan 2015 Last revised: 4 May 2020
Date Written: May 1, 2020
Abstract
We study the relationship between societal trust and informativeness of analyst research in a cross-country setting. We predict and find that societal trust have both direct and indirect effects on the informativeness of analyst forecasts. The direct effect is that in societies with higher levels of trust, analysts are more likely to refrain from taking actions that may betray the trust that society has placed in them (analyst trust effect). The indirect effect of societal trust arises from the enhanced transparency in financial reporting of the underlying firms (firm trust effect). We find that the analyst trust effect remains strong after controlling for institutional characteristics at analyst domicile countries, and is more pronounced in the presence of perceived conflicts of interest. Additional analysis shows that the analysts who have changed their country locations converge towards the trust norms in the newly relocated countries. Our results should be of interest to investors and policymakers who are concerned about the efficient flow of information in capital markets.
Keywords: Societal trust, informal institutions, analyst research, conflicts of interest, informativeness, market reactions
JEL Classification: G24, O17, P48
Suggested Citation: Suggested Citation