Yangyang Chen (et al.) of the City University in Hong Kong – Department of Accountancy, wondered if financial analysts with overseas experience did a better job of forecasting than stay at home peers?
China’s a good place to study this as there are more than a few analysts who’ve been overseas (to study or work) and chosen to return. The researchers confined their study to China but believe their conclusions will be applicable to other emerging markets.
So, to the question. The answer is yes, analysts with overseas experience do appear do a better job of forecasting than less traveled peers; but the bigger question is why should this be so?
There seem to be three main factors at work:
- What the researchers call the ‘foreign knowledge acquisition channel’. In passing they note U.S. analysts have a proven habit of underestimating U.S. company’s foreign earnings and posit that international exposure gives analysts a better understanding of earnings trends from a global perspective.
- Having been removed from China for a period of time these returnees have weaker socioeconomic ties with the managers of large institutional pools of money. It’s an open secret that analysts are compensated in large part based on the opinion of a brokerage’s largest clients. Without these connections the currying of favor isn’t such an easy go-to.
- The cognitive flexibility and creative thinking that comes out of exposure overseas has already been documented as a contributory factor in Board Member success at established Western corporations. It doesn’t seem like too much of a reach therefore to assume this same effect is at work with the returnee financial analysts too.
Having established there’s an effect it’d be useful to know how significant it is and here’s the rub. The research finds “..analyst foreign experience is associated, on average, with an increase of 4.1% in the forecast accuracy relative to the sample mean.”
From a statistical point of view that might be ‘significant’, but from a practical point of view it doesn’t suggest one should ignore the noise from the well-connected local crowd either.
In the real world most of us are aware that a range of views is important and in the final analysis there’s never any substitute for one’s own work based on as much first hand information as it’s practicable to gather.
The methodology in the paper is impressive but highlights the ‘hand-cranked’ nature of a lot of the data forming the researcher’s conclusions. This is a concern as degrees of subjectivity have been introduced which, given the small size of the effect, would make me nervous about applying conclusions from the work too dogmatically in real-world contexts.
The stay-at-homers can rest easy at their posts for the time being I think.
You can access the paper in full via the following link Does Foreign Experience Matter?
Happy Sunday.