In-Group Bias in Financial Markets

Abstract

This paper examines whether social biases such as the in-group bias affects the behavior of sell-side equity analysts and the information dissemination process. We find that analysts exhibit more favorable views about firms headed by CEOs of their own type. Using gender to identify group membership, we demonstrate that male analysts have lower earnings forecasts and worse stock recommendations for firms headed by female CEOs. Analyst forecasts are also relatively more optimistic when the CEO belongs to the same racial/ethnic category as the analyst, and when the CEO's name sounds similar to the analyst name. Alternative explanations for our findings based on selective information access and selection bias have no empirical support.

Keywords: In-group bias, female analysts, earnings forecasts, stock recommendations, forecast accuracy, market reaction

JEL Classification: G14, G24