When Is the Client King? Evidence from Affiliated-Analyst Recommendations in China’s Split-Share Reform

56 Pages Posted: 3 May 2019 Last revised: 15 Jun 2019

See all articles by Kam C. Chan

Kam C. Chan

Western Kentucky University - Department of Accounting and Finance

Xuanyu Jiang

Central University of Finance and Economics (CUFE)

Donghui Wu

The Chinese University of Hong Kong; Center for Institutions and Governance

Nianhang Xu

Renmin University of China - School of Business

Hong Zeng

Chongqing University - School of Economics and Business Admininstration

Multiple version iconThere are 2 versions of this paper

Date Written: April 2, 2019

Abstract

China’s split-share reform of 2005 (the Reform) converts the previously restricted shares held by founding shareholders to shares tradable on the open market. Against this backdrop, we study how underwriter-affiliated analysts and firms’ large shareholders interact in the event of the latter’s sales of restricted shares. We document that recommendations made by affiliated analysts are significantly more optimistic when firms’ large shareholders plan to sell their restricted shares. This optimism, however, is associated with negative post-sale stock returns, suggesting that large shareholders profit from share sales but at the cost of public investors. Furthermore, large shareholders sell more restricted shares through the affiliated brokerages with analysts issuing more optimistic recommendations and firms under their control are more likely to appoint such brokerages as lead underwriters when they refinance in the future. For the affiliated analysts, they conduct more site visits to the firms after the share sales, thereby improving their earnings forecast accuracy. Our analysis shows how conflicts of interest by financial intermediaries arise following the Reform and leads to large shareholders’ extraction of rents from public investors. These findings have regulatory implications.

Keywords: analyst recommendations; conflict of interest; split-share reform

JEL Classification: G24; G30; G38

Suggested Citation

Chan, Johnny and Jiang, Xuanyu and Wu, Donghui and Xu, Nianhang and Zeng, Hong, When Is the Client King? Evidence from Affiliated-Analyst Recommendations in China’s Split-Share Reform (April 2, 2019). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3364343 or http://dx.doi.org/10.2139/ssrn.3364343

Johnny Chan

Western Kentucky University - Department of Accounting and Finance ( email )

Bowling Green, KY 42101
United States

Xuanyu Jiang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Donghui Wu (Contact Author)

The Chinese University of Hong Kong ( email )

Sha Tin
N.T.
Hong Kong
852-3943 7836 (Phone)
852-2603 5114 (Fax)

HOME PAGE: http://www.bschool.cuhk.edu.hk/staff/wu-donghui/

Center for Institutions and Governance ( email )

Room 1033, 10/F
Cheng Yu Tung Building, No. 12 Chak Cheung Street
Hong Kong
China

HOME PAGE: http://www.bschool.cuhk.edu.hk/centres/centre-for-institutions-and-governance/

Nianhang Xu

Renmin University of China - School of Business ( email )

Beijing
China

Hong Zeng

Chongqing University - School of Economics and Business Admininstration ( email )

Shazheng Str 174, Shapingba District
Chongqing, Chongqing 400030
China

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