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Cultural Diversity on Wall Street: Evidence from Sell-Side Analysts’ Forecasts

Abstract:

We study the effect of cultural diversity on an industry's labor force using information

about sell-side research analysts' cultural backgrounds and their output, the consensus earnings

forecast. Using both exogenous shocks to analyst diversity and panel regression methods, we

find that increases in cultural diversity positively affect the quality of the consensus earnings

forecast. These positive effects of cultural diversity are not driven by given firms' scopes of

operation, nor by their foreign trade. Further, our findings are also robust to controlling for other

dimensions of diversity. Through exploring earnings conference calls as one viable mechanism

for our findings, we consequently find that cultural diversity increases conference call

participation and interaction, indicating that diversity improves information flows. Overall, we

show that diversity offers significant benefits in a typical capital market environment, in which

participants compete against, rather than cooperate with, each other