Political Cycles and Analyst Bias: Evidence from China

Abstract

We examine the role that political-economic factors play in shaping financial analyst bias using a series of scheduled provincial elections in China. Theory on political business cycles holds that, in a short period prior to these political events, provincial politicians have stronger incentives to coerce analysts into issuing optimistic opinions to public companies under their jurisdiction. Consistent with this intuition, we document that analysts are significantly more likely to issue favorable recommendations or revise their recommendations upward during political event periods. In cross-sectional evidence consistent with expectations, we find that the relation between political events and analyst optimism is more pronounced for analysts: covering local state-controlled companies, working for brokerage firms affiliated with local politicians, covering companies in provinces with more potential investment banking business, and working for brokerage firms with less valuable reputations to protect. Supporting that foreign analysts are more immune to local political forces, we find that their recommendations do not become more optimistically biased during political event periods. Analyzing stock returns upon and subsequent to the release of favorable recommendations during political event periods reveal that investors perceive such recommendations as less credible, although they fail to fully discount their information value. Reinforcing our main evidence, we also find that financial analysts are more likely to issue optimistic earnings forecasts during political event periods. Collectively, our research implies that politicians successfully distort analyst incentives for political purposes.

Speaker Biography

Prof. Zhifeng Yang, Ph.D., CFA, earned his Ph.D. from University of Alberta. His teaching interests cover corporate governance, financial accounting, and financial statement analysis. The foci of Dr. Yang’s research have been on corporate governance, finance, and auditing issues in emerging markets. Dr. Yang has published in Journal of Accounting Research, Journal of Accounting and Economics, The Accounting Review, and Contemporary Accounting Research. Dr. Yang is an associate editor of China Journal of Accounting Research and he is a member of the editorial board of China Journal of Accounting Studies. Dr. Yang is currently an associate Professor at Stony Brook University.