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

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.

Citation

Hou, T. C., & Gao, S. (2021). The impact of economic freedom on financial analysts' earnings forecast: Evidence from the Asia-Pacific region. Finance Research Letters, 43, Article 102009. https://doi.org/10.1016/j.frl.2021.102009

• Journal Article Type: Article
• Acceptance Date: Mar 3, 2021
• Online Publication Date: Mar 7, 2021
• Publication Date: 2021-11
• Deposit Date: Dec 2, 2021
• Publicly Available Date: Mar 8, 2022
• Journal: Finance Research Letters
• Print ISSN: 1544-6123
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 43
• Article Number: 102009
• DOI: https://doi.org/10.1016/j.frl.2021.102009
• Keywords: Asia-Pacific economies, Earnings forecast, Economic freedom, Forecast bias
• Public URL: http://researchrepository.napier.ac.uk/Output/2825932