Chaebol-Affiliated Analysts: Conflicts of Interest and Market Responses

46 Pages Posted: 18 Mar 2009 Last revised: 29 Aug 2011

See all articles by Ayca Altintig

Ayca Altintig

Claremont Colleges - Peter F. Drucker Graduate School of Management

Tomas Mantecon

University of North Texas

Kyojik Song

Sungkyunkwan University

Date Written: March 18, 2009

Abstract

Some Korean business groups, or chaebols, have a large stake in securities firms that issue analysts’ reports on their member companies. This structure is unique in that industrial companies and securities firms are affiliated and operate within the same group. We investigate the informational content of earnings forecasts, stock recommendations and target prices made by the chaebol-affiliated analysts, using data collected between 2000 and 2008. The chaebol analysts tend to make more optimistic earnings forecasts for the member companies. The mean EPS forecast error (5.36%) of the affiliated analysts for the same chaebol company are significantly larger than that (3.23%) of other chaebol and independent analysts. The chaebol analysts also assign better recommendations by almost one level and set target prices 2.5% higher to the member companies after controlling for company and analyst characteristics. These results are consistent with the hypothesis that chaebol analysts’ reports are biased by conflicts of interest. Stock market reactions do not differ in response to announcements of stock recommendations issued by affiliated vs. non-affiliated analysts. This suggests that capital markets do not recognize the conflicts of interest inherent in chaebol analysts’ reports.

Keywords: Business group, Analysts, Conflicts of interest, naive investor

JEL Classification: G24, G30

Suggested Citation

Altintig, Z. Ayca and Mantecon, Tomas and Song, Kyojik, Chaebol-Affiliated Analysts: Conflicts of Interest and Market Responses (March 18, 2009). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1362405

Z. Ayca Altintig

Claremont Colleges - Peter F. Drucker Graduate School of Management ( email )

The Drucker School of Management
1021 North Dartmouth Avenue
Claremont, CA 91711
United States

Tomas Mantecon

University of North Texas ( email )

1155 Union Circle #305340
Denton, TX 76203
United States

Kyojik Song (Contact Author)

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)
82-2-760-0497 (Phone)

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