CEOs' hometown connections and optimism in analyst earnings forecasts: Evidence from China

Abstract

This study investigates the relationship between CEOs' hometown connections with suppliers and analyst earnings forecast optimism. We put forward two hypotheses: CEOs' hometown connections increase the optimism bias of analysts and analysts take the initiative to lower their optimistic earnings forecasts in response to CEOs' hometown connections. Using the hand-collected data of CEOs' hometown connections in Chinese A-share listed companies from 2009 to 2020, the empirical results suggest that CEOs' hometown connections with suppliers are negatively associated with analyst optimism bias, and the finding holds up in the subsequent robustness tests. The hometown connections, as an informal institution, not only alleviate CEO moral hazard but also provide information advantage. This "hometown effect" is more pronounced for firms with lower-quality of information disclosure, lower transparency, lower-quality auditing, higher agency costs, and firms in provinces with weaker marketization. In general, this study demonstrates the importance of CEOs' hometown connections in analyst optimism bias, and it enriches and expands research on the determinant factors of analyst optimism.