Do business relationships affect the accuracy of analyst earnings forecasts? Evidence from China

Abstract

Supporting the ‘conflicts of interest hypothesis’, we show that, in China, better-informed analysts issue more optimistically biased forecasts and reputation of financial analysts mitigates the bias. We contribute to literature by showing that such an adverse information effect varies over types of investment banking relationships and a better developed local legal environment reduces forecast bias. Our results call for a better developed market mechanism to discipline analysts so as to issue independent and accurate earnings forecasts in China