People often interpret the same information in very different ways, shaped by their perspectives and ways of thinking. In the financial world, this can influence how analysts evaluate companies and predict future performance. According to Yong Yu, professor of accounting at the University of Texas at Austin McCombs School of Business, analysts with different orientations toward time may produce very different financial forecasts for the same company. Some focus heavily on short-term performance, while others place greater emphasis on long-term growth and value creation.

In a recent study, Yu and Shuping Chen, also a professor of accounting at Texas McCombs, explored how cultural backgrounds shape financial forecasting. Their findings suggest that analysts whose ancestral cultures place greater value on long-term orientation tend to make more long-term earnings forecasts and produce more accurate long-term stock recommendations. The researchers defined long-term forecasts as predictions extending beyond one year, while short-term forecasts covered one year or less. Analysts from cultures with stronger long-term orientations achieved average monthly stock returns of 0.61%, compared with 0.31% for analysts from less long-term-oriented cultural backgrounds.

Yu explains that modern financial markets often reward near-term performance, encouraging a more short-sighted approach to investing. However, analysts who focus on long-term information may provide investors with a more balanced and comprehensive understanding of a company’s future potential. The study suggests that incorporating longer-term thinking can improve investment decisions, particularly in industries where future growth and innovation are important drivers of value.

To examine the relationship between culture and forecasting behaviour, the researchers analysed data from 3,797 U.S. financial analysts between 2000 and 2014. Working with collaborators Jay Jung of City St George’s, University of London and Sonya Lim of DePaul University, they used surnames and immigration data to infer analysts’ likely cultural origins. Sources included the Onomap database, which draws on telephone directories and electoral records. The researchers also distinguished first-generation immigrants, who were more likely to retain characteristics of their original cultures.

The team then matched analysts’ cultural backgrounds with long-term orientation scores developed by social psychologist Geert Hofstede. Analysts associated with cultures emphasising long-term planning were 7.6% more likely to issue long-term earnings forecasts and 11 percentage points more likely to use sophisticated valuation methods such as discounted cash flow analysis. These analysts also performed especially well when evaluating companies with significant intangible assets or uncertain long-term prospects, where future-oriented thinking may be particularly valuable.

The study highlights the importance of analytical and cultural diversity in financial markets. Analysts with stronger long-term orientations were also more likely to encourage company managers during earnings calls to share information about future strategies and long-term goals. Importantly, these analysts remained just as accurate as their peers in making short-term predictions, suggesting that their added strength lies in providing deeper long-term insight. Yu argues that both short-term and long-term perspectives are necessary for investors to gain a fuller and more accurate picture of a company’s value and future potential.

More information: Shuping Chen et al, Analysts’ Cultural Long-Term Orientation and Their Information Production, Contemporary Accounting Research. DOI: 10.1111/1911-3846.70058

Journal information: Contemporary Accounting Research Provided by University of Texas at Austin