Political Cycles and Analyst Bias

61 Pages Posted: 30 Oct 2018

See all articles by Jeffrey Pittman

Jeffrey Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration

Zhifeng Yang

Stony Brook University

Sijia Yu

City University of Hong Kong (CityUHK) - Department of Accountancy; Xi'an Jiaotong University (XJTU) - Department of Accountancy

Date Written: October 5, 2018

Abstract

We examine the role that political-economic factors play in shaping financial analyst bias using a series of scheduled provincial elections in China. Theory on political business cycles holds that, in a short period prior to these political events, provincial politicians have stronger incentives to bias analyst opinions toward optimism. Consistent with this intuition, we document that analysts are significantly more likely to issue favorable recommendations or revise their recommendations upward during political event periods. In cross-sectional evidence consistent with expectations, we find that the relation between political events and analyst optimism is more pronounced for analysts: covering local state-controlled companies, working for brokerage firms affiliated with local politicians, covering companies in provinces with more potential investment banking business, and working for brokerage firms with less valuable reputations to protect. Supporting that foreign analysts are more immune to local political forces, we find that their recommendations do not become more optimistically biased during political event periods. Analyzing stock returns upon and subsequent to the release of favorable recommendations issued during political event periods reveal that investors perceive such recommendations as less credible, although they fail to fully discount their information value. Reinforcing our main evidence, we also find that financial analysts are more likely to issue optimistic earnings forecasts during political event periods. Collectively, our research implies that politicians successfully distort analyst incentives for political purposes.

Keywords: Political Cycle; Government Intervention; Analyst Optimistic Bias; Corporate Information Environment

JEL Classification: M40; M41; G18; G24

Suggested Citation

Pittman, Jeffrey A. and Yang, Zhifeng and Yu, Sijia, Political Cycles and Analyst Bias (October 5, 2018). Available at SSRN: https://ssrn.com/abstract=3262070 or http://dx.doi.org/10.2139/ssrn.3262070

Jeffrey A. Pittman

Memorial University of Newfoundland (MNU) - Faculty of Business Administration ( email )

St. John's, Newfoundland A1B 3X5
Canada
709-737-3100 (Phone)
709-737-7680 (Fax)

Zhifeng Yang (Contact Author)

Stony Brook University ( email )

Health Science Center
Level 3, Room 043
Stony Brook, NY 11794-8322
United States

Sijia Yu

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Xi'an Jiaotong University (XJTU) - Department of Accountancy ( email )

Xi’an
China

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