Share Pledging and Optimism in Analyst Earnings Forecasts: Evidence from China

Abstract

This study examines the relation between share pledging by controlling shareholders and optimism in analyst earnings forecasts. Using a sample of listed Chinese firms from 2007 to 2018, we find that analysts make more optimistic forecasts for firms whose controlling shareholders have pledged their shares for bank loans and whose share pledge ratio is high. This relation is stronger for firms with poor prior stock performance, for firms located in regions with a high level of marketization, and for analysts who have close connections with firms, but is weaker for reputable analysts and those from larger broker firms. In addition, share pledging firms’ analyst optimism becomes weaker when the share-pledging loan approaches the end of the term and when the analyst forecast date is closer to the earnings announcement, and becomes more pronounced when analysts make forecasts over a longer horizon. The results suggest that in cases of share pledging, the threat of losing controlling rights creates significant incentives for controlling shareholders to collude with analysts.

Keywords: Share pledging; Controlling shareholder; Analyst forecast optimism; Incentive to collude

JEL Classification: G20; G30