Analyst Behavior: The Geography of Social Interaction

What is it about?

In this paper, I provide empirical evidence that an analyst working in Germany is more likely to publish a high (low) price target regarding a DAX30 stock when other Germany based analysts are also optimistic (pessimistic) about the same stock. This effect of geographical proximity is not biased by the fact that DAX30 companies are headquartered in Germany. Shedding light on how influence takes place, I show that influence through communication and the exchange of opinion within small groups of analysts plays a vital role. This mainly applies during a bullish market environment. When markets are bearish, analysts' incentives induce them not to deviate too much from the overall average, such that then observational learning has a greater impact.

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Why is it important?

With this paper, I contribute to the literature on social influence in financial markets by providing a detailed analysis of the geographical structure of social interaction and relating it to the prevailing market environment. This represents a further step into the direction of understanding how analysts deviate from their own estimates and how analysts’ forecasts have to be interpreted in order to get valuable investment recommendations.