Economic reality is full of situations that contradicts the myth of a rational homo economicus. The study conducted by Dr. Jay Jungs team at Cass Business school provides an astonishing new illustration, which other studies had already touched on: an analysts presumed ethnic origin has important consequences on the credibility he or she is given.
Findings from the study from the Cass Business School suggest that an American investor will be more sensitive to Mr Smith's expectations than Mr Loiseauxs. And his Russian colleague will follow Mr Ivanov's advice more than Mr Yamamoto's. This is the kind of conclusion that could emerge from the work of Cass Business School under the leadership of Jay Jung, whose team studied, from 1996 to 2014, the interactions between the data of 5,516 analysts and 6,495 companies (or more than 760,000 revisions of estimates). To be perfectly accurate, the work focused on the United States, i.e. the relationship between American investors and analysts covering American stocks. The objective is to discover whether surname biases can affect the information process and investment decisions of equity market participants.
A "favorable" patronymic
Jung's starting point is as follows: investors are more receptive to the revision of an analyst's estimate if the analyst has a last name that is from a country that is popular (see final illustration), and this bias leads to a stronger market reaction if the estimate is revised by the analyst. A postulate based on psychological classics. " We found that, conditional on good forecasting performance, having a favorable surname made it more likely for an analyst to get elected as an All-Star analyst and survive in the profession when his or her brokerage house went out of business or went through a M&A (mergers and acquisition) process," explains Jung, who has subjected his or her models to various quantitative and qualitative tests. But the conclusions do not vary: the impact of the family name remains the same regardless of the configurations. By refining the analysis, the team was also able to realize that the effect is more pronounced in some situations. This is the case when the company concerned has many small shareholders. Or that the analyst's country of origin is very easily deductible when it comes to downward revisions. The impact of the surname, on the other hand, is lower when it comes to a star analyst (i.e., recognized for the relevance of his or her recommendations), female analysts and those whose first name is clearly American.
The examples of 9/11 and the war in Iraq
To better illustrate its point, the Cass Business School team relied on two major events. The attacks of 11 September 2001 and the rejection of the 2003 intervention in Iraq by France and Germany. In the first case, the market began to react less to changes in estimates by analysts with Arab surnames, while the rate of favorable opinions of Middle Eastern countries among the American population increased from 27.5 to 21%. In the second case, the same reaction was given to analysts whose names had German or French consonances. We are quite far from the homo economicus. In fact, you may recall that during this period, some American restaurants stopped serving French fries on the grounds that they were called "French fries", and called them "freedom fries". The US citizens ' favorable opinion of the two European countries had fallen from nearly 80% to less than 45% over this period, which clearly cast a veil of suspicion on the forecasts made by the French and Germans.
But perhaps this bias is not one. After all, an analyst born in the United States with a very American-sounding name may simply be better at American values? No, according to the study, which also shows that there is no significant relationship between a "favorable" name and the quality of expectations. Investors' perceptions therefore bias their information. However, Jung also found that among analysts with high quality estimates, those with an appropriate surname are more likely to be promoted to star status or to keep their jobs in the event of a merger. The family name therefore has an impact on the career.
The cross-referencing of the study data makes it possible to show that a stock reacts faster on the stock market if a change in forecast is made by an analyst with a "native" surname, as a result of investors' greater confidence in their expectations. In the end, it is not the age of the captain but his name that is likely to influence an investor's decision, and therefore to distort the functioning of the market.
To define a favorable name, the team used immigration records and the Gallup survey on the popularity rating of foreign countries in the United States (above). The picture reads as follows: 91% of Americans have a very good or good opinion of Canadians.