Government Shareholdings in Brokerage Firms and Analyst Research Quality

Abstract

We examine how government ownership in brokerage firms influences analyst research quality in the Chinese context. When the government has strong incentives to prop up market prices, analysts from brokerages with significant government shareholdings ("government-brokerage analysts") issued relatively more optimistic earnings forecasts and revisions and more favorable stock recommendations; they were also slower to revise. Although these forecasts are also relatively less accurate, they influenced investors' beliefs. In other times and contexts, government-brokerage analysts produce relatively more neutral and timely research or relatively more accurate and less optimistic forecasts. Government-brokerage analysts thus balance maintaining market credibility against complying with government incentives. In doing so, government-brokerage analysts serve both market advisory and stabilization functions.

Keywords: Sell-side analysts; Forecast optimism; Forecast accuracy; Government ownership; Shareholders; Emerging markets; Coordinated economies

JEL Classification: G14; G24; G28; O16