In-Group Bias in Financial Markets
44 Pages Posted: 13 Dec 2016 Last revised: 14 Jul 2018
Date Written: June 29, 2018
This paper investigates whether equity analysts are subject to in-group favoritism when forecasting earnings of firms. Specifically, we argue that equity analysts may have less favorable views about firms that are not headed by CEOs of their own "group.'' We define groups based on gender, ethnicity, and political attitudes. Examining analysts' earnings forecasts we find that, compared to female analysts, male analysts have lower assessments of firms headed by female CEOs than of firms headed by male CEOs. As a result, earnings surprises of firms headed by female CEOs are systematically upward biased. Results are very similar if we define in-groups based on ethnicity or political attitudes. Analysts' "buy'' and "sell'' recommendations are also biased towards their own in-group. Examining cumulative abnormal returns (CARs) surrounding earnings announcements, we do not find that the market undoes this bias.
Keywords: Ingroup Bias, Analyst Forecasts
JEL Classification: G02, G14, G24
Suggested Citation: Suggested Citation