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    Government Incentives and Financial Intermediaries: The Case of Chinese Sell-Side Analysts
    29 Mar 2018Working Paper Summaries

    Government Incentives and Financial Intermediaries: The Case of Chinese Sell-Side Analysts

    by Sheng Cao, Xianjie He, Charles C.Y. Wang, and Huifang Yin
    This study is the first to examine analysts’ incentives vis-à-vis the government in a context where government has the ability and motives to influence capital market institutions. The paper highlights the role of government incentives in analysts’ behavior and output.
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    Author Abstract

    We study how sell-side analysts produce information in a context where the central government can influence financial intermediaries. Leveraging seven economic periods between 2005 and 2015 when the Chinese government had strong incentives to prop up the stock market, we show that sell-side analysts employed at state-owned brokerages issued relatively optimistic earnings forecasts and stock recommendations during these periods. This relative optimism is particularly pronounced in earnings forecasts for larger firms and for state-owned enterprises and is found regardless of analysts' experience or star status or of their brokerages' degree of dependence on commissions. Although these optimistic forecasts are also relatively less accurate, the evidence suggests that they influence investors' beliefs. These findings highlight the role of government incentives in the behavior and output of analysts in emerging-market contexts.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: March 2018
    • HBS Working Paper Number: HBS Working Paper #18-095
    • Faculty Unit(s): Accounting and Management
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    Charles C.Y. Wang
    Charles C.Y. Wang
    Glenn and Mary Jane Creamer Associate Professor of Business Administration
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