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Stock market openness and analyst forecast bias
Affiliation:1. School of Economics, Zhejiang University of Technology, Hangzhou, Zhejiang, China;2. College of Business, University of Rhode Island, Kingston, Rhode Island, U.S.A., and School of Business, Sun Yat-Sen University, Guangzhou, Guangdong, China;3. Lingnan College, Sun Yat-Sen University, Guangzhou, Guangdong, China;4. School of Economics and Management, Tongji University, Shanghai, China;1. Hong Kong University of Science and Technology, Hong Kong, China;2. Institute of Accounting and Finance, Shanghai University of Finance and Economics, China;3. Guanghua School of Management, Peking University, China;4. SILC Business School, Shanghai University, China;1. School of Business, University of Connecticut, 2100 Hillside Rd., Unit 1041A, Storrs, CT 06269, United States;2. College of Business, Colorado State University, 501 W. Laurel St., Fort Collins, CO 80523, United States;1. School of Accountancy, Central University of Finance and Economics, Beijing 100081, China;2. SKEMA Business School, 99 Ren’ai Road, Suzhou 215123, China;1. Peking University, HSBC Business School, China;2. BI Norwegian Business School, Norway;3. Umeå School of Business, Economics and Statistics, Sweden;1. School of Business, University of North Carolina at Pembroke, 1 University Drive, PO Box 1510, Pembroke, NC 28372, USA;2. University of Missouri – St. Louis, 210 Anheuser-Busch Hall, 1 University Blvd., St. Louis, MO 63121, USA;1. Lehigh University, USA;2. Santa Clara University, USA;3. Korea Advanced Institute of Science and Technology (KAIST), South Korea;4. California State Polytechnic University, Pomona, USA
Abstract:Biases in analysts’ forecasts can be reduced not only through regulation but also through market mechanisms. In 2014, China launched the Shanghai-Hong Kong Connect program, which opened part of its domestic equity market to foreign investors. The implementation of this program provides a quasi-natural experimental setting to explore whether stock market openness plays a governance role in brokerage firms and minimizes their affiliated analysts' forecast biases. We find that the participation of foreign institutional investors mitigates the forecast biases of affiliated analysts. We also show that these analysts exert more significant effort by conducting more site visits. Our findings suggest that market liberalization can help improving the quality of analysts’ forecasts.
Keywords:Equity market liberalization  Shanghai-Hong Kong connect  Forecast quality  Analyst forecast bias
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