Government affiliation, analyst behavior and the economic consequences

Abstract A significant number of regional brokerage firms in China are owned by their respective local governments. We use this context to examine how local government affiliation affects brokerage firms’ research activities. Using a sample of analyst reports from 2013 to 2021, we find that analysts working at local government‐affiliated brokerage firms are more likely to cover firms within the local government's jurisdiction than non‐affiliated analysts. Local government‐affiliated analysts enjoy an information advantage, as evidenced by the issuance of more accurate earnings forecasts for local firms, compared to those of non‐affiliated analysts. The effect is stronger for local firms with lower information quality. Additionally, local government‐affiliated analysts show more optimism in stock recommendations, but not in earnings forecasts, for local firms, compared to non‐affiliated analysts. The effect is more pronounced for local firms that receive more local government subsidies, operate in regions with greater local government intervention or during the COVID‐19 pandemic and the National Congress conferences, and require more capital market support. The results of this study advance our understanding of the key determinants of analyst performance and provide new evidence in the debate on the role of government intervention in financial institutions.