Politically Affiliated Analysts

53 Pages Posted: 27 Apr 2021 Last revised: 3 May 2021

See all articles by Dongmin Kong

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology; School of Finance, Zhongnan University of Economics and Law

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Shasha Liu

School of Management, Jinan University

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business

Date Written: April 27, 2021

Abstract

Government ownership of financial intermediaries is pervasive around the world. In this study, we examine the impact of the common government ownership between the brokerage and listed firms on the information production role of brokerage firms. We show that affiliated analysts issue more optimistic recommendations on stocks of firms controlled by the same government entity that controls their brokerage firms. This optimistic bias is particularly strong during economic shocks and before impending political promotion events. We also find that stocks recommended by politically affiliated analysts underperform those recommended by independent analysts, suggesting that the optimism is driven by conflicts of interest rather than advantageous information. Furthermore, we find that sophisticated investors perceive the potential bias and incorporate it into their trading. Consistent with an exchange of favors story, politically affiliated brokerage firms receive more underwriting commitments during the issuance of local government debt, and governments subscribe for more shares during seasoned equity offerings by these connected brokerage firms.

Keywords: analyst recommendations; political pressure; institutional investors; conflicts of interest; learning

JEL Classification: G11, G14, G24, M41

Suggested Citation

Kong, Dongmin and Lin, Chen and Liu, Shasha and Xuan, Yuhai, Politically Affiliated Analysts (April 27, 2021). Available at SSRN: https://ssrn.com/abstract=3834917 or http://dx.doi.org/10.2139/ssrn.3834917

Dongmin Kong (Contact Author)

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

School of Finance, Zhongnan University of Economics and Law ( email )

Wuhan, Hubei 430073
China

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Shasha Liu

School of Management, Jinan University ( email )

No. 601, West Huangpu Road
Guangzhou, Guangdong 510632
China

Yuhai Xuan

University of California, Irvine - Paul Merage School of Business ( email )

4291 Pereira Drive
Irvine, CA California 92697-3125
United States

HOME PAGE: http://yuhai.merage.uci.edu/

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