Mandatory Disclosure of Comment Letters and Analysts’ Forecasts

Abstract

In the Chinese capital market, the stock exchanges have been sending comment letters (CLs) to firms in regard to their annual reports since 2013. Both CLs and the firms’ responses to them have been publicly disclosed since the end of 2014. Taking non-financial listed firms from 2013 to 2019 as our sample, we investigate the impact of CLs and their mandatory disclosure on analysts' forecast quality. The results show that during 2013-2014 (when CLs were issued but not disclosed), there is no significant relationship between CLs and analysts’ forecast accuracy or forecast optimism. However, the disclosure of CLs is positively correlated with analysts’ forecast accuracy and negatively associated with forecast optimism. For firms that receive CLs, the quality of analysts’ forecasts is higher when CLs contain more questions. In addition, the impact of CLs on forecast quality is larger for samples with a lower percentage of star analysts than for samples with a higher percentage of star analysts. The impact is also larger for samples with higher earnings volatility than for samples with lower earnings volatility. Comment letter recipients disclose more information on their internal and external risks, which may offer additional information to analysts. Our paper not only enriches the literature on mandatory information disclosure, but also provides incremental evidence on the mechanism behind the effect of comment letters on analysts’ forecasts.