Bilateral political relations and analyst herding

We establish a measure of assessing the bilateral political relations between the United States and other countries. We hypothesize that political events and shifts, evidenced by changes in bilateral political relations, significantly increase uncertainty in financial markets, prompting analysts to adopt herding behavior as a risk-averse strategy. In efforts to navigate bilateral political uncertainty, analysts align their forecasts with the consensus to reduce the risk of individual error. We find that deteriorating bilateral political relations is associated with analysts exhibiting higher levels of herding in their earnings forecasts for foreign stocks listed in the US market, specifically in the form of American Depository Receipts (ADRs) from those countries. We show that uncertainty acts as the channel through which bilateral political relations influence analyst herding. Notably, analyst herding as triggered by poor bilateral political relations results in less accurate earnings forecasts. Overall, as analysts prioritize risk aversion in unpredictable political climates, there is a considerable reduction in the quality of their professional work.