Government Incentives and Financial Intermediaries: The Case of Chinese Sell-Side Analysts
We study how sell-side analysts produce information in a context where the central government can influence financial intermediaries. Leveraging seven economic periods between 2005 and 2015 when the Chinese government had strong incentives to prop up the stock market, we show that sell-side analysts employed at state-owned brokerages issued relatively optimistic earnings forecasts and stock recommendations during these periods. This relative optimism is particularly pronounced in earnings forecasts for larger firms and for state-owned enterprises and is found regardless of analysts' experience or star status or of their brokerages' degree of dependence on commissions. Although these optimistic forecasts are also relatively less accurate, the evidence suggests that they influence investors' beliefs. These findings highlight the role of government incentives in the behavior and output of analysts in emerging-market contexts.
Keywords: sell-side analysts; forecast optimism; forecast accuracy; government incentives; emerging markets; Stocks; Forecasting and Prediction; Business and Government Relations; Emerging Markets;
Citation:
Cao, Sheng, Xianjie He, Charles C.Y. Wang, and Huifang Yin. "Government Incentives and Financial Intermediaries: The Case of Chinese Sell-Side Analysts." Harvard Business School Working Paper, No. 18-095, March 2018. View Details