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The role of analysts in negative information production and disclosure: Evidence from short selling deregulation in an emerging market

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  • Zhu, Lin
  • Chen, Qinyuan
  • Yang, Shengzhi
  • Yi, Zhihong

Abstract

Leveraging from the recent short sales deregulation in China, we examine whether analyst optimism bias increases or decreases in the presence of short sales. We use a novel approach of conducting a textual analysis of research reports to quantify analysts’ negative tone on their covered stocks to proxy for their negative information production and disclosure both pre- and post-short sales deregulation. Using a difference-in-differences approach, our findings suggest that, after short sales deregulation, analysts engage in more negative information production and disclosure as revealed by a more negative tone in their analyst reports. The findings are robust to a battery of checks. Additional analysis suggests that when a covered firm obtains future financing or has high institutional ownership, the extent of negative analyst tone in research reports weakens, indicating that analyst conflicts of interest continue to affect analyst research optimism. Finally, we document that negative information production and disclosure by analysts mediates the impact of short sales deregulation on stock price idiosyncratic volatility and cumulative abnormal return, which suggests the important role of analysts in capital market efficiency.

Suggested Citation

  • Zhu, Lin & Chen, Qinyuan & Yang, Shengzhi & Yi, Zhihong, 2021. "The role of analysts in negative information production and disclosure: Evidence from short selling deregulation in an emerging market," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 391-406.
  • Handle: RePEc:eee:reveco:v:73:y:2021:i:c:p:391-406
    DOI: 10.1016/j.iref.2021.01.016
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    Cited by:

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    2. Fan, Yi & Gao, Yang, 2024. "Short selling, informational efficiency, and extreme stock price adjustment," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1009-1028.
    3. Yang, Hao & Zhang, Qiusheng & Zhao, Xiaofang & Wang, Zhongchao, 2022. "Does political corruption affect mergers and acquisitions decisions? Evidence from China," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 248-266.
    4. Guobin Fang & Xuehua Zhou, 2024. "Web Semantic Analysis of Investor Sentiment, Short Trading, and Stock Market Volatility," International Journal on Semantic Web and Information Systems (IJSWIS), IGI Global, vol. 20(1), pages 1-35, January.
    5. Chen, Xin, 2021. "Lunar eclipses, analyst sentiment, and earnings forecasts: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1007-1024.
    6. Zeyu Xie & Mian Yang & Fei Xu, 2023. "Carbon emission trading system and stock price crash risk of heavily polluting listed companies in China: based on analyst coverage mechanism," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-30, December.

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