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

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 18year 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.

Automated summary

This study reveals an optimistic bias in earnings forecasts, which is stronger for large firms, value firms, stocks with high analyst coverage, and low dispersion in earnings forecasts. Moreover, analysts exhibit a stronger optimistic bias in countries with less economic freedom, while they make more accurate earnings forecasts in countries with more economic freedom. The study also shows that the optimistic bias reduces the accuracy of earnings forecasts, suggesting that an increase in economic freedom could lead to more transparent financial statements and reduce analysts' forecast bias.