Equity analysis is all about valuing stock, and significant Investment Banks are doing it with bias. One problem is that they often have close ties with companies and thus overestimate earnings projections, as the bank stands to profit from the underwriting fees. But it’s not just profit incentives that cause bias. A paper by the University of Hong Kong argues that age-old cultural prejudices are also a factor.

A survey by Eurobarometer asked 15 EU countries how much they trust each other. Europeans from the northern region are overall considered more trustworthy, but southern Europeans tend to trust each other in a cluster. For example, the Finns show a “trust bias” against the Italians. They don’t trust them less than they distrust other EU countries, but just somewhat more than the average do.

The paper connected the number of sell recommendations (1.3 million) from Investment Banks and the “trust bias” numbers. It concluded that its a good indicator of how analysts value a stock. Norwegians are 8.4% more likely to recommend a Danish stock than an Austrian is, and 6.7 % more likely to recommend a UK stock then the French are. This effect is particularly keen on companies that are named similarly to their home countries (like French connection).

“Trust Bias” was found to be the most potent during times of political and economic trouble. Brexit has resulted in British analysts being bullish on domestic firms relative to their Eu counterparts.

Source: https://www.aeaweb.org/conference/2020/preliminary/paper/83H9F272

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