Research in sociology and psychology tells us that beauty can have a significant impact on people’s earning, job opportunities and career success and that attractive individuals generally receive better treatments in the workplace and other social settings.
In the working paper “More than Skin-deep? Analysts’ Beauty and Their Performance”, George Yang, Associate Professor of the School of Accountancy at The Chinese University of Hong Kong (CUHK) Business School, extends the study to information acquisition and forecast performance in China’s capital market. It reveals that the attractiveness of financial analysts is positively associated with their earnings forecast accuracy and stock recommendation informativeness.
“Our study aims to look at whether a predetermined attribute of a financial analyst, namely, their physical attractiveness, affects his or her success in information acquisition and job performance,” says Prof. Yang who works on the study in collaboration with Prof. Ying Cao, Associate Professor of the School of Accountancy of CUHK Business School, Prof. Feng Guan of Shanghai Lixin University of Commerce, as well as Prof. Zengquan Li, Dean of the School of Accountancy at Shanghai University of Finance and Economics.
In capital markets, sell-side financial analysts who are generally employed by broker-dealers and investment banks, play an important role in disseminating the information on particular securities or stocks, giving investors the necessary information they need to judge the attractiveness of certain investments.
“In China, the influence of financial analysts on the stock market is even greater because the market is dominated by retail investors who are more likely to be influenced by the so-called expert opinions than institutional investors,” says Prof. Yang.
Therefore, the financial analysts would actively seek out information from various sources, and the private communication with firm management is one of the critical sources, being viewed as more useful to their earnings forecasts and stock recommendations than firms’ public disclosure and even their own primary research.
Prior research already reveals that analysts who cater to the interests of managers enjoy an information advantage and exhibit superior forecast performance, according to researchers.
In the study, the researchers studied a sample of 89,056 earnings forecasts made by 2,328 analysts from 2005 to 2014. The analysts in their sample come from 102 unique brokerages, which cover all the largest brokerages in China.
At the same time, they downloaded the head-to-shoulder ID photos of all sell-side financial analysts in the sample from the website of the Securities Association of China and asked 63 raters with different education background, occupation, income, and social experience to score them on a five-point scale: 1 for homely or not good looking; 2 for below average; 3 for average; 4 for above average and; 5 for strikingly beautiful or handsome.
The 63 raters were from different settings including a Big Four accounting firm, a brokerage firm, a large private company, as well as university faculty members and students. Of the group, 27 of them are males while the rest are females.
All the raters were reminded to use the common people in the Chinese population, not the sample analysts, as the benchmark for rating and that age should not be considered in rating. Hence, the rating score would be solely based on attractiveness, not depending on how young or old he or she looks.
As expected, the study reveals that the beauty ratings of financial analysts are significantly negatively associated with their forecast errors. That is to say, more attractive analysts make more accurate forecasts.
The research team points out that their evidence suggests that more attractive financial analysts possess an advantage in acquiring information from firm management.
“Compared with other analysts, attractive analysts are more likely to gain advance access to information about pending significant corporate events, and they are more likely to issue a stock recommendation in the quarter prior to the public announcement of three types of corporate news, including restructuring, signing of important business contracts and earning warning. Accordingly, they can produce more informative stock recommendations,” says Prof. Yang.
When it comes to information access, it is important to go to the right people. Again, attractive analysts have better access to them.
“Attractive analysts are more likely to get more information from corporate site visits when they can directly interact with firm management. Our results show that firm managers are more likely to disclose information to those attractive analysts,” he says.
However, what’s interesting is that the study also shows that the beauty effect disappears when managers are allowed to trade their shares in the open market or when their firm is under a share pledge agreement.
To explore the reason behind, Prof. Yang went on to find out if the effect was attributed to managers’ taste-based discrimination on the attractiveness of the analysts or on the notion that attractive people possess superior job-related skills and can better serve the interests of the firm.
If managers believe that more attractive analysts are more capable and valuable to firms, the beauty effect would persist when there is a strong incentive for managers to boost the firm performance and increase the stock value. But, the researchers didn’t find such evidence in the study.
“In other words, it suggests that managers’ discrimination among financial analysts is just taste-driven,” Prof. Yang comments.
“When managers need to rely more on analysts to inform and guide the market, they are less likely to allow their taste for beauty to sway the decision about which analysts to rely on for disseminating firm information,” he explains.
Apart from the relation between analysts’ attractiveness level and their forecast performance, the study also demonstrates the impact of analysts’ attractiveness on their career opportunities. Specifically, it finds that a more attractive analyst is more likely to be voted as a star analyst who is more likely to be hired by top-notch brokerage firms even if, for some reason, he or she could only get into a smaller firm initially.
A New Challenge
While social science has documented and extensively studied the beauty effect, this study provides a new perspective into the practice by financial analysts in capital markets.
Unlike in previous research suggesting that analysts who issue favorable opinions would obtain more information from firm management, the current study documents a different incentive — the indulgence of managers’ taste for beauty, which affects the interaction between managers and financial analysts.
“Since this form of discrimination originates from psychological and social bias and is difficult to regulate, it brings new challenges to regulators and practitioners in the industry,” Prof. Yang says.
This article was first published in the China Business Knowledge (CBK) website by CUHK Business School: https://goo.gl/X6UkJr.