The Impact of Regulatory Policy on Analysts' Forecast Characteristics: Evidence from China

Abstract

Facing regulatory pressure while balancing the demand for market guidance, analysts must weigh the risk of noncompliance to fulfill stakeholders' interests. Literature suggests that analysts strategically adjust the presentation of information in their research reports to meet competing demands. This study analyzes a sample of 76,922 Chinese analysts' research reports from 2018 to 2021 and examines how the 2020 Standards and Norms in China influenced analysts' earnings forecast revisions and textual tones. The findings exhibit a significant reduction in the magnitude of earnings forecast revisions post-policy, particularly among analysts who rely heavily on private information, as well as increased optimism in textual tone. Policy details and penalties enhance compliance, whereas reputation incentives (e.g., star analyst titles) strengthen regulatory effects. However, manipulative incentives (e.g., shared provincial ties, high institutional ownership, or "walk-down" forecast patterns) weaken these effects. This study enhances the understanding of analysts' forecast behaviors and their interrelationships while contributing new insights into the limitations of current regulatory effectiveness.

Keywords: Sell-side Analysts, Regulatory Effects, Earnings Forecast Characteristics, Textual Sentiment, Private Information Dependence