Behavioural biases in sell-side equity analysts’ decision-making: a South African emerging market perspective

Abstract

Purpose Sell-side equity analysts are key information intermediaries, although prior literature has found that they exhibit behavioural biases. The aim of this study is to describe the process followed by analysts in formulating recommendations and to identify the behavioural biases that are likely to influence the process. Design/methodology/approach Semi-structured interviews were conducted with 20 sell-side equity analysts in an emerging market. This direct interaction allowed the researchers to gain insights into analysts’ use of information, related challenges and proclivity for biases. Findings The authors find evidence of intentional and spurious herding, availability, overconfidence and the disposition effect. In spite of the volume of information in corporate reports, a key source of new information is direct interaction with management, where analysts use their intuition or “gut feel”. Weary of the possibility of financial misstatement, they use these direct interactions to assess management’s trustworthiness. The authors find reputational motivations for the safety of herding around the broker consensus. Declining coverage of JSE-listed companies is therefore concerning for the analysts. Originality/value The study contributes to the limited qualitative research on analyst bias in the emerging South African economy. In addition, the focus on the information context of analysts juxtaposes corporate reporting and behavioural finance research to provide insights on the use of various sources of information for decision-making.