Just a short-lived glory?The effect of China's anti-corruption on the accuracy of analyst earnings forecasts

Abstract

Using a quasi-natural experiment based on the introduction of Rule 18, a key component of China's anti-corruption campaign, this paper finds that the accuracy of analysts' earnings forecasts, especially for firms whose headquarters are located in regions with less developed markets, exhibits improvement after Rule 18. We investigate plausible underlying mechanism and find that after Rule 18, firms improve the quality of information conveyed by reported earnings, become more willing to respond to investors' online questions, and are more likely to have their chairpersons or CEOs attend meetings with analysts during analyst site visits. In addition, compared to the pre-Rule 18, the market reacts more positively to analyst earnings forecast reports for firms that lost political connections due to Rule 18 relative to those for other firms. There is also a decrease in stock price synchronicity after Rule 18. However, these effects of Rule 18 last only one year or two, and disappear three years after the policy. These findings suggest that in the short period after the policy, firms increase their information disclosure to the market. Regarding the disappearance of these effects after a longer period of policy implementation, one possibility is that firms adapt to the new rules over time, finding more covert ways to seek rents and re-establish political ties.