In economics, the term optimism bias refers to the impulse for a financial analyst to downplay real risks and paint a future that looks brighter than the evidence suggests. This could be due to a decision-maker’s conflict-of-interest and their firm’s ties to the company being evaluated.
With a focus on sell-side financial analysts’ target price optimism, a new study published in the Journal of Banking & Finance has found brokerages with a higher representation of women analysts issue significantly less optimistic target prices, especially when they face incentives to inflate forecasts due to their brokerage’s affiliation to the firm being analyzed. In analysis of over 63,000 target-price forecasts from 3,400 sell-side analysts at 364 investment banks, the study authors found that increasing the share of women on the analyst team by 8 percentage points resulted in a 12 percent decrease in optimism bias, leading to more realistic financial assessments.
Notably, when women operated on their own, they were just as likely as men to make overly optimistic forecasts. Instead, the decrease in bias was found among teams with gender diversity, with both men and women making more realistic forecasts. Furthermore, the authors confirmed this trend by examining what happens to an analyst’s behavior when they move from a team with less gender diversity to one with more equal representation. Again, they discovered analysts made less optimistic decisions on teams with higher shares of women.
“Taken at face value, the male-dominated analyst profession could benefit from the inclusion of more women, since this would likely result in less biased research,” the authors write.
“We also believe these findings contribute to the discussion around working conditions in the sell-side analyst profession, showing that efforts to accommodate work-life balance to attract female employees may be beneficial to the information disseminated to markets, particularly when conflicts of interest are present.”