Corruption And Analyst Forecast Accuracy

As professional information intermediary,financial analysts play significant role in the capital market.Analysts’ accurate forecast can introduce capital inflow to the most efficient companies,thus optimizing resource allocation and improving market efficiency.Past research has pointed out that the more information analysts use,the less information asymmetry they face with company managers,and the more accurate forecasts are.Although China has gone through significant market reform,the government still keep discretion power over economic resources.In this situation,companies may build political connections or even bribe the officials in order to obtain resources and competitive advantage.Current research has already confirmed that corruption can improve short-term performance by bringing benefits in finance,tax,orders,investment efficiency and so on.However,the effects of corruption are difficult for investors and analysts to foretell.Based on current theories about economic consequences of corruption and analyst forecast,this paper argues that corruption brings about additional uncertainty to company’s earnings,demotivate the briber to disclose sufficient information and changes the way the briber discloses its information.Thus,corruption exacerbates the information asymmetry between analysts and managers and makes forecasting activities more difficult.This paper proposes that corruption lowers analyst forecast accuracy and tests the hypothesis using data of Chinese listed companies of manufacturing industry from 2011 to 2015.In this research,corruption is measured by the scale of entertainment and travel costs,analyst forecast accuracy is measured by error of analysts’ consistent estimate.Regression results show a positive relation between ETC scale and forecast error,thus supports the main hypothesis.Moreover,using the anti-corruption campaign started from 2012 in China as a exogeneous shock,this paper uses DID model to test the impact of this event.Results show that anti-corruption efforts significantly improve forecast accuracy of corrupt companies comparing to non-corrupt companies.Additionally,this paper tests the channel through which corruption imposes impacts on analyst forecast accuracy.Using data of information disclosure scores of listed companies in Shenzhen Stock Exchange,research finds that corruption influenced analyst forecast accuracy by lowering the corrupt companies’information disclosure quality.However,there are still other channels unfound.The conclusion expands the economic consequences of corruption.While existing research mainly focused on the impact of corruption on company’s actual performance,this paper extends the impact to capital market and finds that corruption lowers capital market efficiency.Also,the event study confirms the economic effects of the anti-corruption campaign starting from the 18th CPC national congress.