Does Share Pledge Business Bias Analyst Recommendations?

Abstract

This paper investigates a hidden consequence of the share pledge business. We find that, relative to the recommendations issued by independent analysts, affiliated analysts under brokerage pressure to protect share pledge business exhibit an optimistic bias in their recommendations. Our results are robust when using firm-year-quarter fixed effects in our regressions, when we control for other business connections that might exist between the broker and the firm, and when we conduct an exogenous shock test relating to stocks that become shortable. We further find that our main result is more pronounced when pledged shares experience lower growth in earnings, when pledged share prices drop closer to margin call levels, when pledged shares have higher crash risk, and when the amount of lending backed by pledged shares is larger. Pledge business connected analysts are also more likely to issue favorable recommendations when reputation costs are low, when firms are hard to value, and when firms are dominated by retail investors.