Politically affiliated analysts

Abstract

Government ownership of financial intermediaries is pervasive around the world. In this study, we examine the impact of the common government ownership between the brokerage and listed firms on the information production role of brokerage firms. We show that affiliated analysts issue more optimistic recommendations on stocks of firms controlled by the same government entity that controls their brokerage firms. This optimistic bias is particularly strong during economic shocks and before impending political promotion events. We also find that stocks recommended by politically affiliated analysts underperform those recommended by independent analysts, suggesting that the optimism is driven by conflicts of interest rather than advantageous information. Furthermore, we find that sophisticated investors perceive the potential bias and incorporate it into their trading. Consistent with an exchange of favors story, politically affiliated brokerage firms receive more underwriting commitments during the issuance of local government debt, and governments subscribe for more shares during seasoned equity offerings by these connected brokerage firms.