Analyst Herding and Investor Protection: A Cross-Country Study

31 Pages Posted: 13 Jan 2014 Last revised: 30 Oct 2018

See all articles by Alexander Gabriel Kerl

Alexander Gabriel Kerl

University of Giessen - Department of Financial Services

Thomas Pauls

Goethe University Frankfurt

Date Written: January 13, 2014

Abstract

Using a multi-national dataset, 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 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

Suggested Citation

Kerl, Alexander Gabriel and Pauls, Thomas, Analyst Herding and Investor Protection: A Cross-Country Study (January 13, 2014). Kerl, Alexander; Pauls, Thomas (2014): Analyst herding and investor protection: a cross-country study, in: Applied Financial Economics, Vol. 24, No. 8, p. 533–542. . Available at SSRN: https://ssrn.com/abstract=2378420 or http://dx.doi.org/10.2139/ssrn.2378420

Alexander Gabriel Kerl (Contact Author)

University of Giessen - Department of Financial Services ( email )

Licher Str, 74
Giessen, 35394
Germany

Thomas Pauls

Goethe University Frankfurt ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

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