“The Value of Cultural Diversity on Wall Street: Evidence from Sell-Side Analysts’ Forecasts” by Roni Michaely
This study examines the relationship between cultural diversity in the financial services industry and the quality of analysts’ consensus forecasts, a key factor in setting market earnings expectations. We construct measures of cultural diversity by tracing back analysts’ cultural origins based on their surname. We find evidence consistent with higher levels of cultural diversity improving the accuracy of analysts’ consensus forecasts. We document positive and significant associations between the number of unique cultures contributing to the consensus analyst forecast and the overall accuracy of the forecast. The positive effects of diversity on consensus forecast accuracy are more pronounced when firms have more opaque information environments, but also exhibit declining returns to scale. Using data from an online business networking service, we also demonstrate that the relationship between cultural diversity and forecast accuracy is robust to controlling for other dimensions of diversity (i.e., gender and educational diversity). Further, using exogenous shocks to analyst coverage resulting from brokerage house mergers, we find that drops in analyst coverage that reduce cultural diversity have a more significant impact on forecast accuracy. Finally, cultural diversity is also associated with more interaction on conference calls (as evidenced by analysts raising more questions on calls), lower forecast bias, and reduced forecast dispersion.