Research On Economic Consequences Of Analysts' Earnings Forecast Tendencies

The security analyst is an emerging profession in China. Its main responsibility is to meet investors' demand of value relevant information through distributing earnings forecasts and recommendations of listed companies. Due to asymmetric information, however, analysts face severe conflicts of interest and their independence is eroded. The presence of this market friction pushes interest between security analysts and investors inconsistent. Therefore, analysts are inclined to release optimistic earnings forecasts, which mislead investors and distort market price. Since2001, domestic investment banks targeting leading international prestigious investment banks, set off a wave to restructuring the industry. Institutes of domestic investment banks transferred from a cost center to a profit center, which exacerbated the erosion of analysts' independence. In the end, analysts' morality has been widely questioned after continuous bursts of negative news were disclosed inside analyst industry.Although there is widespread optimistic tendencyin analysts' earnings forecasts, the accuracy of analysts' earnings forecasts are still higher than the time-series statistical models. This inspired us to re-examine the analyst profession within market mechanisms. Though severe is the conflicts of interest analysts face, there are also positive incentive in the market, taking good reputation bringing long-term personal income for example. It is these two opposite forces acting on the securities analysts, making part of the analyst is more conservative, while another part of analysts is more aggressive. The conservative analystsconstitute an analyst profession self-regulatory mechanism, and hence assure analysts' information intermediaryfunction and corporate governance functions.Based on this background, this article will study on conservative analysts and their economic consequences. Specifically, this paper first studies how to distinguish analysts' tendency, and then, explores the motive of conservative analysts. Second, we study the effect of conservative tendency on analysts' intermediary function from a broad view like the accuracy of earnings forecasts, reasons for the accuracy differences. Last but not the least, we examine whether analysts followings have a positive effect on corporate governance and what role do analysts'tendency play in this effect.in this paper, we use both theoretical analysis and empirical analysis to fulfill research purposes. We use OLS method, Logit regression, Probit regression and Heckman2SLS method in empirical study.The arrangements of the paper are as follows:Chapter One:Introduction. This section introduces the research background, theoretical and practical significance of the study, the research methods used, the logics of the research, overall framework and innovation of this study.Chapter Two:Literature Review. This section first reviews analysts intermediary role in the capital market, including accuracy of earnings forecasts, information content of earnings forecasts, characteristics of analysts and the effect of analysts following. Then, this section reviews the reason of analysts' optimistic tendency. It also reviews analysts' corporate governance effect. At the end of this chapter, we summarize the research opportunities in analysts' research.Chapter Three:Industry Background and Theoretical Analysis. This chapter briefly introduces the major responsibility of analysts. Then, this chapter builds a research framework for discussing the mechanism of analysts'tendencies. Agent theory and reputation theory provides insights about the causes of analysts' different tendencies. Efficient Market Hypothesis, Market Microstructure Theory, Governance theory provides insights about analysts' intermediary effect. The last part of this chapter discusses the corporate governance effect on mitigating adverse selection and moral hazard problems.Chapter Four:Defining Analysts' Earnings Forecasts Tendencies. This chapter is the basis of the empirical analysis. It defines conservative analysts are those who make stronger revisions in response to bad news versus good news relative to their peers. The rest of this chapter mainly discusses on the motive of conservative analysts. The results suggest that conservative analysts' can be benefit from future career advancement.Chapter five:Intermediary Effect of Earnings Forecasts. This chapter discusses how analysts' tendencies affect analysts'intermediary effect. In this section, we first test whether capital market can identify different tendencies of analysts. Then, we discusses whether conservative analysts can provide more accurate earnings forecasts. Taking advantage of nonfinancial information like corporate social responsibility information, we test whether analysts get a higher accuracy forecasts by using a broad information sources.Chapter Six:Corporate Governance Effect of Earnings Forecasts. This chapter discusses how analysts' tendencies affect analysts' corporate governance effect. We first find a positive relation between analysts following and value of listed companies, and the more the conservative analysts follow, the higher the value of the listed company. Then we dig into how analysts followings affect company value by using an over invest analysis framework.Chapter Seven:Conclusion. This chapter summarizes the conclusions and shortcomings of this study. It also points out future research opportunity.The main findings of this paper are as follows:First, the motive of conservative analysts is to maximize their personal gain. Comparing to those aggressive analysts, conservative analysts are more likely to be hired by prestigious investment banks and therefore, have a more promising career development.Second, conservative analysts react more to bad news relative to good news, making their earnings forecast much closer to reality. Our empirical results suggest that earnings forecasts released by conservative analysts are more accurate, and can lead to stronger market reaction. Besides, the higher accuracy of conservative analysts' earnings forecasts can be attributed to a broad information sources used by conservative analysts. They not only dig in value relevant information from non-financial information like corporate social responsibility information, but also help the capital market to integrate information into price.Third, we find that analysts followings have a positive effect on value of the listed company. Further research suggests that this is mainly because analyst following can limit company managers'opportunistic behavior by constraining their overinvestment. The more conservative the analyst is, the stronger their governance effect is.The innovations of this paper are as follows: First, we build a theoretical analysis framework to study on the economic consequences of analyst earnings forecasts. It derives of two basic theories:agent theory, which underlines analysts' optimistic tendency and reputation theory, which underlines analysts'conservative tendency. These two opposite tendency consists of the logic starting point of our research. Then, we put intermediary function and governance function on this cornerstone, by using efficient market hypothesis, market microstructure theory and governance theory.Second, unlike most researches focus on analysts'optimistic tendency, we emphasizes on conservative tendency of analysts. We make a clear definition about conservative tendency, and then study on its cause and its economic consequences, which provides new perspective on analyst related researches.Third, we use nonfinancial information to discuss analysts' intermediary effect. Because financial and nonfinancial information are both significant sources, our study can help market participants understand how analysts make use of all these kinds of information, which also have a practical value on how listed companies disclosing nonfinancial information.