Analyst mother tongue language negativity and forecast optimism

Abstract

I examine whether and how the level of negativity of US financial analysts’ mother tongue language affects their earnings forecast optimism. By collecting negative emotional words (expressing death, diseases and violence) from 25 different languages, I construct a novel measure of language negativity at the country-level covering 47 countries around the world, capturing a country's general tendency to use negative narratives in citizen’s daily life. I find that financial analysts with their mother tongue language characterized by a high level of negativity tend to issue less optimistic earnings forecasts. Additional result suggests that the effect of language negativity on analyst forecast optimism tends to be stronger (1) during financial crisis period; (2) for firms with loss, a high level of earnings volatility, and analyst with limited attention; (3) for younger analysts and analysts working for a smaller brokerage firm. Additional results suggest that higher levels of language negativity may dissuade analysts from making excessively optimistic forecasts, ultimately result in a decrease in analyst overall forecast errors. Overall, the finding of this study supports the conjecture that the level of narrative negativity across languages can have a significant impact on capital market participants’ behavior. Thus, it sheds light on how culturally inherited emotion can affect analyst forecast optimism.