Information Dissemination Through Embedded Financial Analysts: Evidence from China

The Accounting Review

50 Pages Posted: 16 Oct 2018 Last revised: 25 Jun 2019

See all articles by Zengquan Li

Zengquan Li

Shanghai University of Finance and Economics - School of Accountancy

T.J. Wong

University of Sothern California

Gwen Yu

University of Michigan

Date Written: June 20, 2019

Abstract

When emerging market firms disclose relationship-based transactions, they face a tradeoff in which greater transparency may help lower their cost of capital at the cost of revealing proprietary information. We find that firms overcome this challenge by relying on analysts within their private networks (i.e., connected analysts) who, through repeated interaction with the firm, can better verify relationship-based transactions. Using Chinese firms, we show that firms with more connected analysts have more accurate consensus forecasts and lower forecast dispersion. When a connected analyst departs and stops covering a firm, the accuracy and informativeness of the unconnected analysts’ forecasts decrease, suggesting that information spills over from the connected analyst to analysts outside the network. We find a potential mechanism for this information spillover: communication through common institutional clients. The findings suggest that embedded financial analysts—those who share close connections with firms and analysts—serve as a channel for disseminating proprietary, hard-to-verify information.

Keywords: Financial analysts, Information spillover, Social networks, Information advantage

JEL Classification: G14, G15, M40, N25

Suggested Citation

Li, Zengquan and Wong, T.J. and Yu, Gwen, Information Dissemination Through Embedded Financial Analysts: Evidence from China (June 20, 2019). The Accounting Review. Available at SSRN: https://ssrn.com/abstract=3254441 or http://dx.doi.org/10.2139/ssrn.3254441

Zengquan Li

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

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

T.J. Wong

University of Sothern California ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

Gwen Yu (Contact Author)

University of Michigan ( email )

701 Tappan Street
R3350
Ann Arbor, MI MI 48109
United States
7347635934 (Phone)

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