IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v43y2021ics1544612321000908.html
   My bibliography  Save this article

The impact of economic freedom on financial analysts' earnings forecast: Evidence from the Asia-Pacific region

Author

Listed:
  • Hou, Tony Chieh-Tse
  • Gao, Simon

Abstract

This study investigates the impact of economic freedom (EcF) on analysts’ earnings forecast (AEF) accuracy. EcF is measured from five aspects: Government, Protection, Money, Trade, and Regulation. With the sample of 7,014 firms from 12 economies in the Asia-Pacific region over the 18-year period, this study finds an optimistic bias in AEFs. The optimistic bias is stronger for large firms, value firms, stock with high analyst coverage, and low dispersion in AEFs. Also, the optimistic bias is stronger from analysts in economies with less EcF than in more freedom ones. Analysts are making more accurate earnings forecasts for firms in economies with more EcF. In addition, the study finds the optimism bias reduced the earnings forecast accuracy. These findings may suggest that an increase of EcF would lead to more transparent financial statements, which further reduces the analysts’ forecast bias.

Suggested Citation

  • Hou, Tony Chieh-Tse & Gao, Simon, 2021. "The impact of economic freedom on financial analysts' earnings forecast: Evidence from the Asia-Pacific region," Finance Research Letters, Elsevier, vol. 43(C).
    • Handle: RePEc:eee:finlet:v:43:y:2021:i:c:s1544612321000908
    DOI: 10.1016/j.frl.2021.102009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612321000908
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2021.102009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Cen, Ling & Hilary, Gilles & Wei, K. C. John, 2013. "The Role of Anchoring Bias in the Equity Market: Evidence from Analysts’ Earnings Forecasts and Stock Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(1), pages 47-76, February.
    2. Frankel, Richard & Lee, Charles M. C., 1998. "Accounting valuation, market expectation, and cross-sectional stock returns," Journal of Accounting and Economics, Elsevier, vol. 25(3), pages 283-319, June.
    3. Haw, In-Mu & Hu, Bingbing & Lee, Jay Junghun, 2015. "Product market competition and analyst forecasting activity: International evidence," Journal of Banking & Finance, Elsevier, vol. 56(C), pages 48-60.
    4. Galanti, Sébastien & Vaubourg, Anne Gaël, 2017. "Optimism bias in financial analysts' earnings forecasts: Do commissions sharing agreements reduce conflicts of interest?," Economic Modelling, Elsevier, vol. 67(C), pages 325-337.
    5. Joshua C. Hall & Robert A. Lawson, 2014. "Economic Freedom Of The World: An Accounting Of The Literature," Contemporary Economic Policy, Western Economic Association International, vol. 32(1), pages 1-19, January.
    6. Francis, J & Soffer, L, 1997. "The relative informativeness of analysts' stock recommendations and earnings forecast revisions," Journal of Accounting Research, Wiley Blackwell, vol. 35(2), pages 193-211.
    7. Fan, Joseph P. H. & Wong, T. J., 2002. "Corporate ownership structure and the informativeness of accounting earnings in East Asia," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 401-425, August.
    8. Danling Jiang & Alok Kumar & Kelvin K. F. Law, 2016. "Political contributions and analyst behavior," Review of Accounting Studies, Springer, vol. 21(1), pages 37-88, March.
    9. Ishigami, Shohei & Takeda, Fumiko, 2018. "Market reactions to stock rating and target price changes in analyst reports: Evidence from Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 52(C), pages 134-151.
    10. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
    11. Ole†Kristian Hope, 2003. "Accounting Policy Disclosures and Analysts' Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 20(2), pages 295-321, June.
    12. Chan, Louis K. C. & Karceski, Jason & Lakonishok, Josef, 2007. "Analysts' Conflicts of Interest and Biases in Earnings Forecasts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(4), pages 893-913, December.
    13. Hodgdon, Christopher & Tondkar, Rasoul H. & Harless, David W. & Adhikari, Ajay, 2008. "Compliance with IFRS disclosure requirements and individual analysts’ forecast errors," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 17(1), pages 1-13.
    14. Terence Lim, 2001. "Rationality and Analysts' Forecast Bias," Journal of Finance, American Finance Association, vol. 56(1), pages 369-385, February.
    15. Bin Ke & Yong Yu, 2006. "The Effect of Issuing Biased Earnings Forecasts on Analysts' Access to Management and Survival," Journal of Accounting Research, Wiley Blackwell, vol. 44(5), pages 965-999, December.
    16. Andrew R. Jackson, 2005. "Trade Generation, Reputation, and Sell‐Side Analysts," Journal of Finance, American Finance Association, vol. 60(2), pages 673-717, April.
    17. Frankel, Richard & Kothari, S.P. & Weber, Joseph, 2006. "Determinants of the informativeness of analyst research," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 29-54, April.
    18. Francis, J & Philbrick, D, 1993. "Analysts Decisions As Products Of A Multitask Environment," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 216-230.
    19. Cowen, Amanda & Groysberg, Boris & Healy, Paul, 2006. "Which types of analyst firms are more optimistic?," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 119-146, April.
    20. Abarbanell, Jeffery S. & Lanen, William N. & Verrecchia, Robert E., 1995. "Analysts' forecasts as proxies for investor beliefs in empirical research," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 31-60, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Liu, Xingyu & Kok Loang, Ooi, 2023. "Analysts’ forecast optimism and cash holding: Evidence from China," Finance Research Letters, Elsevier, vol. 57(C).
    2. Yan, Min & Gong, Xinshu, 2024. "Impact of green credit on green finance and corporate emissions reduction," Finance Research Letters, Elsevier, vol. 60(C).
    3. Alvarado, Rafael & Cuesta, Lizeth & Kumar, Pavan & Rehman, Abdul & Murshed, Muntasir & Işık, Cem & Vega, Nora & Ochoa-Moreno, Santiago & Tillaguango, Brayan, 2022. "Impact of natural resources on economic progress: Evidence for trading blocs in Latin America using non-linear econometric methods," Resources Policy, Elsevier, vol. 79(C).
    4. Hoover, Gary A. & Smimou, K., 2023. "Socially conscious investment funds and home country institutions," Economic Analysis and Policy, Elsevier, vol. 79(C), pages 395-417.
    5. Alfonsina Iona & Andrea Calef & Ifigenia Georgiou, 2023. "Credit Market Freedom and Corporate Decisions," Mathematics, MDPI, vol. 11(7), pages 1-13, March.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    2. Mei-Chen Lin & J. Jimmy Yang, 2023. "Do lottery characteristics matter for analysts’ forecast behavior?," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 1057-1091, October.
    3. Hu, Jun & Long, Wenbin & Luo, Le & Peng, Yuanhuai, 2021. "Share pledging and optimism in analyst earnings forecasts: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 132(C).
    4. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    5. Pacelli, Joseph, 2019. "Corporate culture and analyst catering⁎," Journal of Accounting and Economics, Elsevier, vol. 67(1), pages 120-143.
    6. Nerissa C. Brown & Kelsey D. Wei & Russ Wermers, 2014. "Analyst Recommendations, Mutual Fund Herding, and Overreaction in Stock Prices," Management Science, INFORMS, vol. 60(1), pages 1-20, January.
    7. Chan, Chia-Ying & Lo, Huai-Chun & Su, Yi-Ru, 2014. "Distribution of stock ratings and analyst recommendation revision," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 273-286.
    8. Chen, Xin, 2021. "Lunar eclipses, analyst sentiment, and earnings forecasts: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1007-1024.
    9. Li, Shi & Wu, Chaopeng & Yang, Shijie, 2021. "Affiliated block shareholders and analyst optimism," The North American Journal of Economics and Finance, Elsevier, vol. 55(C).
    10. Andreas Charitou & Irene Karamanou, 2020. "Sleeping with the enemy: should investment banks be allowed to engage in prop trading?," Review of Accounting Studies, Springer, vol. 25(2), pages 513-557, June.
    11. Roger, Tristan & Roger, Patrick & Schatt, Alain, 2018. "Behavioral bias in number processing: Evidence from analysts’ expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 149(C), pages 315-331.
    12. Hugon, Artur & Muslu, Volkan, 2010. "Market demand for conservative analysts," Journal of Accounting and Economics, Elsevier, vol. 50(1), pages 42-57, May.
    13. Zhao, Chen & Li, Yubin & Govindaraj, Suresh & Zhong, Zhaodong (Ken), 2022. "CDS trading and analyst optimism," The British Accounting Review, Elsevier, vol. 54(4).
    14. Prokop, Jörg & Kammann, Benno, 2018. "The effect of the European Markets in Financial Instruments Directive on affiliated analysts’ earnings forecast optimism," Journal of Economics and Business, Elsevier, vol. 95(C), pages 75-86.
    15. Elizabeth Devos & Erik Devos & Seow Eng Ong & Andrew C. Spieler, 2016. "Who Follows REITs?," Journal of Real Estate Research, American Real Estate Society, vol. 38(1), pages 129-164.
    16. Sanjay W. Bissessur & David Veenman, 2016. "Analyst information precision and small earnings surprises," Review of Accounting Studies, Springer, vol. 21(4), pages 1327-1360, December.
    17. Boubakri, Narjess & Bouslimi, Lobna & Zhong, Rui, 2022. "Political uncertainty and analysts’ forecasts: International evidence," Journal of Financial Stability, Elsevier, vol. 59(C).
    18. Régis BRETON & Sébastien GALANTI & Christophe HURLIN & Anne-Gaël VAUBOURG, 2011. "Does the firm-analyst relationship matter in explaining analysts' earnings forecast errors?," LEO Working Papers / DR LEO 469, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    19. Ji, Xu & Dong, Yan & Vagnani, Gianluca & Yang, Xiaoqi, 2024. "Stock market reactions and optimism bias in analysts’ earnings forecasts: An analysis of China's stock markets," Finance Research Letters, Elsevier, vol. 59(C).
    20. Thabang Mokoaleli-Mokoteli & Richard J. Taffler & Vineet Agarwal, 2009. "Behavioural Bias and Conflicts of Interest in Analyst Stock Recommendations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 384-418.

    More about this item

    Keywords

    Asia-Pacific economies; Earnings forecast; Economic freedom; Forecast bias;
    All these keywords.

    JEL classification:

    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:43:y:2021:i:c:s1544612321000908. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.