Changes in Recommendation Rating Systems, Analyst Optimism, and Investor Response

Tseng, Yen-Jung; Wilson, Mark

doi:10.1007/s10551-019-04139-2

Cited by 7 publications

(1 citation statement)

References 26 publications

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“…Other scholars provide evidence that reputation and career concern is a crucial counterfactor against analysts' optimism bias (Fang & Yasuda, 2009; Jackson, 2005; Ljungqvist et al, 2007). Moreover, regulatory reforms and legal enforcement aiming to limit the relationship between research and investment banking departments (e.g., the Global Settlement and NASD Rule 2711 in the US and the Market Abuse Directive in Europe) can reduce analysts' propensity to issue biased research (Corwin et al, 2017; Dubois et al, 2014; Tseng & Wilson, 2019). We add to this literature by showing that the relaxation of short‐sale constraints, a market reform that improves stock price efficiency and reduces information asymmetry, can restrain analysts' conflicts and enhance their independence.…”

Section: Introductionmentioning

confidence: 99%

Short selling and the independence of business‐related analysts: Evidence from an emerging market

Chen

Jin

Yang

2022

Accounting & Finance

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This paper investigates whether short‐sale deregulation improves analysts' independence in an emerging market where conventional mechanisms mitigating conflicts of interest are either ineffective or absent. Short selling reduces the effectiveness of analysts' favourable opinions in creating or sustaining overvalued stock prices, thus decreasing the incentives of institutional clients of brokerages to exert pressure on related analysts to initiate coverage and issue biased opinions. Using a difference‐in‐difference approach, we find strong evidence that stocks that are eligible for short sales experience a greater reduction in coverage by related analysts than stocks that are ineligible for short sales. When covered firms become eligible for short sales, the quality of forecasts and recommendations issued by related analysts improves considerably. Further analyses show that shortable firms with a significant reduction in related analysts' coverage are more likely to underperform and to experience stock price crashes in the future. Altogether, our results are consistent with short selling effectively restoring related analysts' independence in emerging markets.

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