Name that forecasting advantage

This article appears in the Fall 2020 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

“Implicit egotism” refers to the way positive associations about ourselves influence important decisions. People named Dennis and Denise are disproportionately drawn to careers in dentistry, for example, just as St. Louis is home to a curious number of people named Louis. Police officers are more likely to reduce speeding tickets for drivers with whom they share a first name.

What about in the purely rational world of investing? Surely implicit egotism doesn’t influence analysts’ forecasts or the funds we buy.

Researchers from UCLA and UC Berkeley find that it does. After examining 1.9 million U.S. earnings forecasts from 1992 to 2018, the authors show that analysts who share a first name with a CEO had more accurate earnings forecasts — 4.9 percentage points higher, on average — than those with no such affinity. The effect was more pronounced when analysts and CEOs shared less common names.

The authors attribute the superior performance to the behavioural bias that leads us to favour people and things we associate with ourselves; in this case, CEOs privilege analysts with the same first name.

“[T]he greater affinity arising from the sharing of a first name will lead to a greater willingness on the part of the CEO to share private information with an analyst and will, in turn, manifest itself in increased forecast accuracy,” the working paper says.

The research raises a regulatory concern. The U.S. Securities and Exchange Commission’s fair disclosure regulation prohibits publicly traded companies from disclosing “material” private information to market professionals. If the regulation were effective, the authors note, then analysts with the name advantage shouldn’t be outperforming peers.

The authors suggest that CEOs still use legal ways to share information with analysts, such as one-on-one meetings that “allow the analyst to take advantage of nonverbal communication in order to make inferences about the manager’s private information.”

How else might implicit egotism play into financial services? The authors point to research about mutual fund flows based on managers’ names. Maybe you have clients who found their way to you for more prosaic reasons than a glowing referral or a dazzling seminar — maybe it came down to your given name.

“Call Me by Your Name: The Effect of Analyst-CEO First Name Commonality on Analyst Forecast Accuracy” by Omri Even-Tov (Haas School of Business, UC Berkeley), Kanyuan Huang and Brett Trueman (both UCLA Anderson School of Management) was published as an SSRN working paper in May 2020.