Information environment, behavioural biases, and home bias in analysts' recommendations: pre- and post-crisis evidence from Asian emerging markets

Can information environment of a firm explain home bias in analysts' recommendations? Can the extent of agency problems explain optimism difference between foreign and local analysts? This paper answers these questions by documenting the effect of information environment on home bias in analysts' recommendations. Using a large data of analysts' recommendations from Asian emerging markets, we show that local analysts issue more optimistic recommendations than their foreign counterparts. However, optimism difference between the two groups is greater for firms with poor information environment. Our results show that optimism difference between the two groups is more than twice as much in firms with poor information environment than in firms with better information environment. We argue that poor information environment pose greater information asymmetries to foreign analysts regarding local firms relative to local analysts. As a result, we expect them to be less optimistic in their recommendations relative to local analysts. However, for firms with better information environment, foreign analysts face less information asymmetries. As a result, they are relatively more optimistic (less pessimistic) in their recommendations, thereby causing convergence in optimism level between foreign and local analysts.