Local Asymmetric Information Advantages: International Evidence from Analysts' European Firm Earnings Forecasts

This study uses analyst earnings forecasts to offer empirical evidence about geographic information asymmetries. The geographic information asymmetry hypothesis (GIAH) states that capital market information and geography are related with informational benefits accruing to local market participants. Home equity bias is attributed in part to cross border geographic information asymmetries. As other studies have observed, empirical evidence relating geography with information asymmetries is relatively scarce. Analyst earnings forecasts offer a setting to test GIAH, leading to the predictions that local analysts issue earnings forecasts that are timelier and more accurate than non-local analysts. Analyst forecasts offer a relatively stringent test of GIAH since analysts are experts, have resources and appear to face incentives to incorporate information into their earnings forecasts. I utilize a sample from seven European countries, defining analysts located inside (outside) each country as local (non-local) analysts. The combined evidence indicates that local analysts forecast earnings more accurately than non-local analysts. Leader and follower tests in the spirit of Cooper, Day and Lewis[2001] indicate that local analysts lead with their forecasts while non-local analysts tend to follow when issuing their forecasts. I infer support for GIAH. Different ability levels or different incentives could also explain the results, although I view these explanations as less likely. The findings inform home equity bias research. The findings also imply that certain accounting studies may need to include analyst location in model specifications as a proxy for access to information. Examples include studies relating disclosure, enforcement and other capital market attributes to analyst earnings forecasts, and studies investigating determinants of analyst forecast accuracy. This study also suggests an avenue to investigate equitable disclosure of financial information and relate it to research investigating levels of financial disclosure.