The impact of disclosure quality on analyst forecasts in China

Abstract

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.