Government Incentives and Financial Intermediaries: The Case of Chinese Sell-Side Analysts

44 Pages Posted: 14 Mar 2018 Last revised: 3 Jun 2019

See all articles by Sheng Cao

Sheng Cao

Tongji University

Xianjie He

Shanghai University of Finance and Economics - School of Accountancy

Charles C. Y. Wang

Harvard Business School

Huifang Yin

Shanghai University of Finance and Economics

Date Written: May 31, 2019

Abstract

We study how sell-side analysts are influenced by government incentives in emerging markets. Leveraging six economic periods between 2005 and 2015 when the Chinese government had strong incentives to prop up the market, we show that analysts from state-owned brokerages issued relatively optimistic earnings forecasts, earnings-forecast revisions, and stock recommendations during these periods; they were also slower to revise. They did so not because of superior information, but to comply with government incentives. These forecasts were less accurate but influenced investors' beliefs. These findings highlight the relative usefulness of analysts' output at times of economic uncertainty in coordinated-economy contexts.

Keywords: Sell-Side Analysts; Forecast Optimism; Forecast Accuracy; Government Incentives; Emerging Markets; Coordinated Economies

JEL Classification: G14; G32; K22

Suggested Citation

Cao, Sheng and He, Xianjie and Wang, Charles C. Y. and Yin, Huifang, Government Incentives and Financial Intermediaries: The Case of Chinese Sell-Side Analysts (May 31, 2019). Harvard Business School Accounting & Management Unit Working Paper No. 18-095. Available at SSRN: https://ssrn.com/abstract=3140069 or http://dx.doi.org/10.2139/ssrn.3140069

Sheng Cao

Tongji University ( email )

1239 Siping Road
Shanghai, 200092
China

Xianjie He

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Charles C. Y. Wang (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Huifang Yin

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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