Consistent Analyst Expectation Error and Earnings Management: Evidence from China. Issue 9 (1st September 2016)

• Record Type: Journal Article
• Authors: Zhou, Zhengyi; Wu, Chongfeng
• Is Part Of: Emerging markets finance & trade. Volume 52:Issue 9(2016)
• Page Start: 2128
• Page End: 2148
• Publication Date: 2016-09-01
• Subjects: Chinese market -- earnings management -- expectation error -- stock analyst; Balkan Peninsula -- Commerce -- Periodicals; Balkan Peninsula -- Foreign economic relations -- Periodicals; Europe, Central -- Commerce -- Periodicals; Europe, Central -- Foreign economic relations -- Periodicals; Europe, Eastern -- Commerce -- Periodicals; Europe, Eastern -- Foreign economic relations -- Periodicals; Turkey -- Commerce -- Periodicals; Turkey -- Foreign economic relations -- Periodicals; Asia -- Commerce -- Periodicals; Asia -- Foreign economic relations -- Periodicals; Eurasia -- Commerce -- Periodicals; Eurasia -- Foreign economic relations -- Periodicals; 382.05
• DOI: 10.1080/1540496X.2015.1068065
• Languages: English
• ISSNs: 1540-496X

Abstract

ABSTRACT: Using data from the Chinese A-share market in 2004–12, we show how cognitive bias of individual analysts led to counterproductive effect in less-developed financial markets. We form an ex ante measure of analysts' expectation error, a measure suitable for markets with a short history. We find that star analysts tend to be more optimistic than ordinary analysts, and their biased opinions influence other analysts because of analyst herding behavior. Two-stage least square regression results suggest that consistent expectation errors among analysts can lead to earnings management. These insights are valuable to investors and regulators.