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Does local happiness mitigate analysts’ optimistic bias?

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  • Li, Yang
  • Xiao, Zhicheng
  • Li, Liuchuang

Abstract

This paper examines the effect of local happiness on mitigating the optimistic bias of sell-side analysts. We find that a one-unit increase in local happiness reduces analysts' optimistic bias by approximately 15%. To address potential endogeneity, we employ an instrumental variable approach based on regional maternal mortality rates and conduct a series of robustness checks. Mechanism analysis reveals that local happiness primarily operates by enhancing social capital, which in turn helps mitigate analysts' research optimism. Additionally, we show that in regions with weak formal institutions, the effect of local happiness—as an informal institution—is more pronounced. Finally, we find that the optimistic earnings forecasts made by analysts in happier regions elicit a more significant market response. Our results highlight the governance role of local happiness as an informal institution in shaping analysts’ optimistic behavior.

Suggested Citation

  • Li, Yang & Xiao, Zhicheng & Li, Liuchuang, 2026. "Does local happiness mitigate analysts’ optimistic bias?," Economic Modelling, Elsevier, vol. 162(C).
    • Handle: RePEc:eee:ecmode:v:162:y:2026:i:c:s0264999326001926
    DOI: 10.1016/j.econmod.2026.107663
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    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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