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When Is the Client King? Evidence from Affiliated‐Analyst Recommendations in China's Split‐Share Reform

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  • Kam C. Chan
  • Xuanyu Jiang
  • Donghui Wu
  • Nianhang Xu
  • Hong Zeng

Abstract

China's split‐share reform of 2005 (the Reform) converts the previously restricted shares held by founding shareholders to shares tradable on the open market. Against this backdrop, we study how underwriter‐affiliated analysts and firms' large shareholders interact in the event of the latter's sales of restricted shares. We document that recommendations made by affiliated analysts are significantly more optimistic when firms' large shareholders plan to sell their restricted shares. This optimism, however, is associated with negative post‐sale stock returns, suggesting large shareholders profit from share sales. Furthermore, large shareholders sell more restricted shares through the affiliated brokerages for which analysts have issued more optimistic recommendations and firms under their control are more likely to appoint such brokerages as lead underwriters when they refinance in the future. The affiliated analysts also conduct more site visits to the firms after the share sales, thereby improving their earnings‐forecast accuracy. Our analysis shows how conflicts of interest by financial intermediaries arise following the Reform and lead to large shareholders' extraction of rents from public investors. Quand le client règne‐t‐il? Données relatives aux recommandations des analystes affiliés dans le cadre de la réforme des actions non négociables en Chine La réforme dite des actions non négociables (split‐share reform) opérée par la Chine en 2005 a donné lieu à la conversion des actions de négociation auparavant restreinte détenues par les action naires fondateurs en actions négociables sur le marché libre. Dans ce contexte, les auteurs s'interrogent sur l'interaction des analystes affiliés aux preneurs fermes et des actionnaires importants des sociétés, lorsque ces derniers vendent leurs actions de négociation restreinte. Ils constatent que les recommandations formulées par les analystes affiliés sont sensiblement plus optimistes lorsque les actionnaires importants des sociétés projettent de vendre leurs actions de négociation restreinte. Cet optimisme est toutefois associé à des rendements négatifs des actions après la vente, ce qui semble indiquer que les actionnaires importants bénéficient de la vente de leurs actions. En outre, les actionnaires importants vendent davantage d'actions de négociation restreinte par l'intermédiaire des courtiers affiliés pour lesquels les analystes ont formulé des recommandations plus optimistes, et les sociétés que contrôlent ces actionnaires sont davantage susceptibles de désigner ces courtiers à titre de placeurs chefs de file lors d'un refinancement ultérieur. Les analystes affiliés effectuent aussi un plus grand nombre de visites sur place dans les sociétés après la vente des actions, améliorant ainsi l'exactitude de leurs prévisions de résultats. L'analyse des auteurs montre en quoi la réforme des actions non négociables engendre des conflits d'intérêts associés aux intermédiaires financiers et fait en sorte que les investisseurs publics paient un tribut aux actionnaires importants.

Suggested Citation

  • Kam C. Chan & Xuanyu Jiang & Donghui Wu & Nianhang Xu & Hong Zeng, 2020. "When Is the Client King? Evidence from Affiliated‐Analyst Recommendations in China's Split‐Share Reform," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 1044-1072, June.
  • Handle: RePEc:wly:coacre:v:37:y:2020:i:2:p:1044-1072
    DOI: 10.1111/1911-3846.12550
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