Time lords? Why culture matters for long-term investment

Financial analysts from cultures that value long-term thinking are better at forecasting long-range movements in capital markets, new research from Bayes Business School suggests.

They outperform their peers in predicting companies’ earnings 2-3 years ahead and in assessing firms’ longer-term growth prospects. An investor allocating £1,000 to stocks recommended by long-term-oriented analysts for 36 months would typically earn £73 per year, compared to an annual return of £37 if following the advice of other analysts. Over three years that would generate additional income of £108.

This advantage disappears when forecasting just 12 months ahead.

Long-term orientation (LTO) is a cultural trait reflecting the extent to which individuals prioritise future outcomes over short-term results. The countries with the highest LTO scores are: South Korea (100), Taiwan (93), Japan (88), China (87), Ukraine (86), and Germany (83). By contrast, the UK score is 51 and the US 26.

The researchers traced the ancestral countries of origin for about 3,800 US analysts based on their surnames and linked country-level cultural data for LTO to them.

The paper, co-authored by Dr Jay Jung, Senior Lecturer in Accounting at Bayes Business School (formerly Cass and part of City St George’s, University of London), has been accepted for publication in the leading academic journal Contemporary Accounting Research.

Dr Jung said: “It is often thought that financial analysts are myopic – that they focus on short-term profits and firm performance, which can in turn cause myopia in their CEOs. However, our research suggests that analysts from long-term oriented cultures place greater emphasis on firms’ long-term prospects and produce more long-term information. This impact of inherited cultural attitudes around long-term thinking has been underappreciated in financial markets.”

We live in an age of falling attention spans, where stocks and other assets can be bought and sold in minutes, 24 hours a day. These cultural and technological changes reinforce, or in some cases magnify, a focus on the short-term. Our findings underline the enduring value of long-term thinking.

The paper’s key findings include:

• Analysts from long-term oriented cultures look further ahead and are more likely to issue long-term earnings forecasts and long-term growth estimates
• The influence of inherited culture is strongest for early-generation immigrants – it decays over generations as analysts become more culturally assimilated.
• Their impact is strongest when analysing:

• Firms with more volatile sales or asset bases
• Growth firms with low book-to-market ratios
• Firms with greater reliance on intangible assets, such as brands, patents, or technology.

By probing managers on longer-term issues during conference calls, Dr Jung said, these analysts also encourage managers to disclose additional long-term information to investors and other market participants – changing the very nature of market information available. They are also more likely to use sophisticated valuation models which explicitly incorporate expectations about firms’ longer-term prospects.

He concluded: “With diversity, equity, and inclusion (DEI) programmes increasingly under attack, our findings also highlight the economic value of employing and supporting a culturally diverse workforce.”