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Chaebol-affiliated analysts: Conflicts of interest and market responses

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  • Song, Kyojik “Roy”
  • Mantecon, Tomas
  • Altintig, Z. Ayca

Abstract

Some Korean business groups, or chaebols, have a large stake in securities firms that issue analysts’ reports on their member companies. This structure is unique in that industrial companies and securities firms are affiliated and operate within the same group. We investigate the informational content of earnings forecasts, stock recommendations and target prices made by the chaebol-affiliated analysts, using data collected between 2000 and 2008. The chaebol analysts tend to make more optimistic earnings forecasts for the member companies. The mean EPS forecast error (5.36%) of the affiliated analysts for the same chaebol company are significantly larger than that (3.23%) of other chaebol and independent analysts. The chaebol analysts also assign better recommendations by almost one level and set target prices 2.5% higher to the member companies after controlling for company and analyst characteristics. These results are consistent with the hypothesis that chaebol analysts’ reports are biased by conflicts of interest. Stock market reactions do not differ in response to announcements of stock recommendations issued by affiliated vs. non-affiliated analysts. This suggests that capital markets do not recognize the conflicts of interest inherent in chaebol analysts’ reports.

Suggested Citation

  • Song, Kyojik “Roy” & Mantecon, Tomas & Altintig, Z. Ayca, 2012. "Chaebol-affiliated analysts: Conflicts of interest and market responses," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 584-596.
  • Handle: RePEc:eee:jbfina:v:36:y:2012:i:2:p:584-596
    DOI: 10.1016/j.jbankfin.2011.09.001
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    References listed on IDEAS

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    2. repec:pdc:jrnbeh:v:13:y:2017:i:2:p:142-151 is not listed on IDEAS
    3. Demirbag, Mehmet & McGuinness, Martina & Akin, Ahmet & Bayyurt, Nizamettin & Basti, Eyup, 2016. "The professional service firm (PSF) in a globalised economy: A study of the efficiency of securities firms in an emerging market," International Business Review, Elsevier, vol. 25(5), pages 1089-1102.
    4. Chan, Chia-Ying & Lo, Huai-Chun & Su, Yi-Ru, 2014. "Distribution of stock ratings and analyst recommendation revision," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 273-286.

    More about this item

    Keywords

    Business groups; Chaebols; Conflicts of interest; Analysts’ earnings forecasts; Stock recommendations; Target prices;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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