When Is the Client King? Evidence from Affiliated-Analyst Recommendations in China's Split-Share Reform

• 成果类型: Article
• 署名作者: Chan, Kam C.; Jiang, Xuanyu; Wu, Donghui; Xu, Nianhang; Zeng, Hong
• 署名单位: Zhongnan University of Economics & Law; Western Kentucky University; Central University of Finance & Economics; Chinese University of Hong Kong; Renmin University of China; Chongqing University
• 刊物名称: CONTEMPORARY ACCOUNTING RESEARCH
• ISSN/ISSBN: 0823-9150
• DOI: 10.1111/1911-3846.12550
• 发表日期: 2020
• 页码: 1044-1072
• 关键词: institutional investors; corporate governance; Investment banks; Emerging markets; career concerns; OF-INTEREST; performance; environment; forecasts; BEHAVIOR

摘要

China's split-share reform of 2005 (the Reform) converts the previously restricted shares held by founding shareholders to shares tradable on the open market. Against this backdrop, we study how underwriter-affiliated analysts and firms' large shareholders interact in the event of the latter's sales of restricted shares. We document that recommendations made by affiliated analysts are significantly more optimistic when firms' large shareholders plan to sell their restricted shares. This optimism, however, is associated with negative post-sale stock returns, suggesting large shareholders profit from share sales. Furthermore, large shareholders sell more restricted shares through the affiliated brokerages for which analysts have issued more optimistic recommendations and firms under their control are more likely to appoint such brokerages as lead underwriters when they refinance in the future. The affiliated analysts also conduct more site visits to the firms after the share sales, thereby improving their earnings-forecast accuracy. Our analysis shows how conflicts of interest by financial intermediaries arise following the Reform and lead to large shareholders' extraction of rents from public investors.