Controlling Shareholders’ Equity Pledges, CSR Information Disclosure, and the Accuracy of Analysts’ Earnings Forecasts
57 Pages Posted: 12 Apr 2021
Date Written: April 9, 2021
We identify and predict circumstances where equity pledging by controlling shareholders reduces the accuracy of analysts’ earnings forecasts in the Chinese market. First, we predict that controlling shareholders opportunistically manipulate firm disclosure to avoid or alleviate margin call costs of pledging, increasing non-diversifiable information risk and impairing the accuracy of analysts’ earnings forecasts. Consistent with predictions, analyst forecast errors are positively associated with the proportion of shares pledged and this association strengthens with the severity of margin call pressure. Results demonstrate that the consequences of share pledging are widespread, with increases in analyst forecast error continuing to occur even in low information asymmetry contexts such as large firms and stable earnings. Second, CSR disclosures and the quality of CSR reporting moderates the relation between analysts’ forecast errors and share pledging by controlling shareholders. The adverse effects of share pledging significantly decline when firms disclose CSR reports with improvements in analyst forecast accuracy in excess of 50 percent on average. Further, equity pledging by controlling shareholders represents a financing transaction and we find that capital stakeholder disclosures in the CSR report are generally most useful in improving analyst forecast accuracy.
Keywords: Equity pledge, analyst forecast accuracy, information risk, corporate social responsibility.
JEL Classification: M41
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