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Connections over competence: The impact of political ties on sell-side research quality
Guo, Kaizhao
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Shi, Yanghua
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Wen, Jingshu
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Document Type:
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Conference presentation
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Year of publication:
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2024
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Conference title:
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2024 AFA Annual Meeting
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Location of the conference venue:
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San Antonio, TX
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Date of the conference:
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05.-07.01.2024
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Related URLs:
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Publication language:
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English
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Institution:
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Business School > ABWL u. Finanzierung (Theissen 2009-)
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Subject:
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330 Economics
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Classification:
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JEL:
G15 , G24 , D73 , P26,
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Abstract:
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There is academic debate on whether corruption is socially efficient. In this paper, we investigate whether there is corrupt hiring of politically connected financial analysts at China’s state-owned enterprises (SOEs), and the consequences of such corruption. Using a textual measure of A-share healthcare analysts’ industry knowledge, we find that politically connected analysts have lower research quality compared with merit-based hires. In addition, politically connected analysts tend to plagiarize other analysts and follow salient news, and investors lose 12.01% on average following their research recommendations. In return for hiring politically connected analysts, directors at SOE brokerages tend to be promoted by China’s securities regulators. After China’s anti-corruption campaign reached the financial sector, many analysts at SOE brokerages lost their political ties and the stricter top-down monitoring is likely to reduce rent seeking. After this exogenous shock, our difference-in- differences tests show that research quality improves at local SOEs and informational efficiency increases for firms most intensely covered by local SOEs relative to non-SOE brokerages. Contrary to the view that corruption merely redistributes resources to bureaucrats, our results suggest that corrupt hiring of politically connected analysts may distort the allocation of employment opportunities, reduce financial market efficiency and impose real costs on investors.
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