Accurate forecasts attract clients; biased forecasts keep them happy

Chao Zhang, David G. Shrider, Dun Han, Yanran Wu*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)

Abstract

We examine whether business relationships between mutual funds and sell-side analysts influence earnings forecasts using Chinese data from 2007 to 2019. Consistent with prior studies, our results support the commission pressure hypothesis. Analysts' forecasts are overly optimistic for the holdings of existing fund clients. Significantly, we propose the potential client hypothesis and show that analysts' forecasts are more accurate for the holdings of funds that are not clients than for holdings of clients or for stocks not held by any fund. Our results suggest that commission pressure from existing fund clients increases analysts' optimistic bias, while potential clients pressure inhibits analysts' optimistic bias to some extent. Finally, our evidence supports the conflicts of interest hypothesis. Commission pressure is reduced as economic uncertainty grows.

Original languageEnglish
Article number102067
Number of pages17
JournalInternational Review of Financial Analysis
Volume81
Early online date12 Feb 2022
DOIs
Publication statusPublished - 01 May 2022
Externally publishedYes

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