The impact of disclosure quality on analyst forecasts in China

ABSTRACT

Since the establishment of the Shenzhen Stock Exchange (SZSE) Disclosure Ranking System in 2001, the disclosure quality of listed companies has increased in China. As a result, analysts can access more timely, valuable, and reliable information to understand companies’ overall operating status, financial reports, and accrual components of earnings. As analysts can save time and costs when they have access to high-quality information provided by firms, their earnings forecast error and optimism bias are reduced, and analysts’ divergence of opinion on firm prospects decreases. Using a sample of 419 A-share firms listed on the Main Board of the SZSE over the 2001–2018 period, we investigate whether disclosure quality affects analysts’ forecasting behaviour in China’s securities market using SZSE disclosure ranking data, and find that high disclosure quality improves analyst forecast accuracy and reduces forecast optimism and forecast dispersion. We also find that disclosure quality is associated with an increase in a firm’s stock price synchronicity with the market and a decrease in industry-wide and firm-specific information, and that a good disclosure ranking can enhance the credibility of firm-specific information and therefore its usefulness to financial analysts in the emerging market of China.

KEYWORDS:

• Disclosure quality
• forecast accuracy
• mandatory disclosure
• voluntary disclosure
• Information Disclosure Ranking System
• synchronicity

JEL:

• G17
• G38
• M41

Acknowledgement

We thank the special issue editors and anonymous reviewers for their comments.

Data availability

All data used in the study are available from the public sources cited in the text.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 China’s market capitalisation rose from nothing before the 1990s to US$6.6 trillion in 2016.

2 For instance, Lang et al. (2003, p. 325) report a lower ranking for analyst coverage and forecast accuracy in China than for most of the other 27 countries, including 13 developing countries.

3 Chinese listed companies can be delisted if they report losses for two consecutive years (called ST) or three consecutive years (called ST*).

4 The annual averages of DQ used in Figure 1 are different from those provided in Table 2 because we use only DQ data for firms with no missing analyst forecast data in Figure 1, whereas we use DQ data for all SZSE-listed firms in Table 2.

5 0.0081 (the coefficient on DQ) * 1 (change of one disclosure rank)/0.045 (the mean of ACCURACY)=18.0%.

6 In this analysis, we exclude the year indicators because POST is subsumed otherwise.

7 The related documents can be downloaded from the following link: http://www.szse.cn/disclosure/notice/general/index.html

Additional information

Funding

This work was supported by Universidade de Macau: [Grant Number SRG2016-00076-FBA].