Stock Market Liberalization, Investment Banks, and Analyst Forecast Quality: Evidence From a Quasi-Natural Experiment in China

Posted: 16 Oct 2019

See all articles by Jeffrey Pittman

Jeffrey Pittman

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

Baolei Qi

Xi'an Jiaotong University (XJTU) - School of Management

Zeyu Sun

Xi'an Jiaotong University (XJTU)

Zi-Tian Wang

The University of Queensland

Date Written: October 6, 2019

Abstract

Capitalizing on a quasi-natural experiment in China where certain investment banks become investible to the global market across different periods, we explore the role that stock market liberalization plays in shaping local analysts’ incentives to provide high quality forecasts. In a staggered difference-in-differences research design to improve identification, we find that analysts affiliated with liberalized banks (i.e., pilot analysts) significantly reduce the errors and bias in their earnings forecasts from the pre-liberalization period to the post-liberalization period, relative to non-pilot analysts whose employers remain under strict capital controls during the same timeframe. Consistent with expectations, this result is concentrated among local investment banks that are smaller, have higher existing institutional ownership, and have stronger tournament incentives. Additionally, we identify three mechanisms through which market liberalization affects the quality of analysts’ forecasts: pilot analysts (i) become more focused by reducing the size of their coverage portfolios; (ii) devote more effort to forecasting; and (iii) become subject to harsher career punishments for making deficient forecasts. Our analysis provides insight on the importance of financial globalization to the institutional environment of a country’s capital market.

Keywords: stock market liberalization, investment banks, analyst forecast quality

JEL Classification: F65; G24; G30

Suggested Citation

Pittman, Jeffrey A. and Qi, Baolei and Sun, Zeyu and Wang, Zi-Tian, Stock Market Liberalization, Investment Banks, and Analyst Forecast Quality: Evidence From a Quasi-Natural Experiment in China (October 6, 2019). Available at SSRN: https://ssrn.com/abstract=3465112

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)

Baolei Qi

Xi'an Jiaotong University (XJTU) - School of Management ( email )

28,Xianning West Road
Xi'an, Shaanxi 710049
China

Zeyu Sun

Xi'an Jiaotong University (XJTU) ( email )

XI AN, SHANNXI
China
+8618829352009 (Phone)

Zi-Tian Wang (Contact Author)

The University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

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