| Dose analyst external evaluation mechanism affect analysts' forecast behavior? Can it improve the analyst industry research report quality or even enhance the capital market information environment? The answers to these questions can help us draw a full picture of the role of analyst external evaluation mechanism.Using the sell-side analyst rankings of New Fortune,which is the most influential analyst external evaluation mechanism in China,and analyst forecast data from 2003-2017,this paper investigates whether analyst external evaluation mechanism affects analysts' behavior.Further,we use the event of sudden suspension of “New Fortune Best Analyst” on September 21,2018 as a quasi-experiment to investigate the role of analyst external evaluation mechanism played in whole analyst industry and capital market information environment.Analyst external evaluation mechanism refers to annual poll conducted by certain magazines of institutional investors.And a few sell-side analysts who perform well relative to other analysts covering the same industry are voted by institutional investors as “Star Analyst”.As there is a large pay discrepancy between Star Analyst and NonStar analyst,this compensation structure implies that “Star Analyst” competition can be viewed as a tournament,in which the outcome is determined by relative performance and the winner takes a disproportionally larger award than the loser.As compensation is determined by relative ranking,low-ranking analysts(Non-Star Analysts)have relatively stronger incentives to take risker behavior than Star-Analysts because they have nothing to lose.Besides,“New Fortune Best Analyst” requires voters to identify specific analysts by name and the votes are weighted by the size of the respondent's institution,which certainly enforces a recognition requirement.All of these means that analysts should not only demonstrate their outperformed professional skills but also improve their recognition.Because of the different endowments of celebrity between star analysts and non-star analysts,there are differences in the choice of their competitive strategies.Ranking as “Star Analyst” leads to millions of income premium to analyst,and the expected increase in compensation will provide sell-side analysts with strong incentive to win and encourage analysts to devote more time and energy to digging into firm information to improve the quality and informativeness of their research reports.As analysts often use their industry peers' reports to construct their own reports,this increased effort can lead to greater information for the whole analyst industry.With more firm-specific information provided by analyst,analysts' earnings forecast precision and the firm specific information contained in stock market will be greatly improved.Using the sell-side analyst rankings of New Fortune from 2003 to 2017,we find that,comparing with star analyst,non-star analysts as interim losers are more likely to increase the boldness of their earnings forecast;and this forecast boldness is more pronounced in the voting period;and once the analyst won the title of stat analyst,their boldness of forecast decreases;ceteris paribus,non-star analyst's bold forecast is less informative,compared with “non-bold” forecast of non-star analyst and bold forecast of star analyst.And in further research,we find that non-star analysts are more likely to announce bold forecast as the influence of external evaluation mechanism expands,and even among star analysts,intra-group ranking exert influence analysts' forecast boldness,lower intra-group ranking star analysts are more likely to issue bold forecast.We also find that,non-star analysts are more likely to initiate new coverage for firms without present analyst coverage relative to star analyst;and this new initiation coverage behavior is pronounced during voting period.Using the event of sudden suspension of “New Fortune Best Analyst” resulting from Founder Securities “Dinner Scandal” as quasi-experiment to investigate the role of analyst external evaluation mechanism played in capital market information environment,we find that earnings forecast precision declines at the whole analyst industry level and the stock price synchronicity increases,following the suspension of New Fortune Best Analyst.These finding suggest that the absence of an analyst's external selection mechanism will lead to an overall decline in the quality of the analyst's forecast and thus decrease the amount of firm specific information in capital market,which is not conducive to the effective operation of the capital market.As there is always a dispute about the necessity and effectiveness of the voting of “New Fortune Best Analyst”,our study provides insights to the whole effect of analyst external evaluation mechanism,and help to comprehensively evaluate the effect of analyst external selection mechanism on analyst behavior and capital market information environment. |
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