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Do Ownership Ties Increase the Optimistic Bias of Analysts’ Earnings Estimates? Evidence from Corporate Financing in the Korean Market

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  • Chune Young Chung

    (School of Business Administration, College of Business and Economics, Chung-Ang University, 84 Heukseok-ro, Dongjak-gu, Seoul 06974, Korea)

  • Euisup Lee

    (Merrill Lynch International LLC, 84-1 Taepyung Road Chung-Gu Seoul Finance Center, Seoul 04520, Korea)

  • Chang-Gyun Park

    (Korea Capital Market Institute, 143 Uisadang-daero, Yeongdeungpo-gu, Seoul 07332, Korea)

Abstract

Previous studies argue that analysts provide optimistic estimates for corporations with which their brokerage houses have a business relationship. In this study, we investigate whether brokers with ownership ties issue optimistic estimates when their affiliates need support, as when raising debt or issuing equity. We find that Chaebol-owned brokerage houses provide optimistic earnings estimates for their affiliates relative to those provided by other brokers, especially before debt financing. However, we do not observe this relationship in the case of equity financing. These results imply that analysts with ties to corporations expect earnings management to occur around seasoned equity financing and, thus, consider the risks to their reputations. Finally, our results show that brokerage houses with ownership ties are not significantly more accurate than other brokerage houses are.

Suggested Citation

  • Chune Young Chung & Euisup Lee & Chang-Gyun Park, 2020. "Do Ownership Ties Increase the Optimistic Bias of Analysts’ Earnings Estimates? Evidence from Corporate Financing in the Korean Market," Sustainability, MDPI, vol. 12(11), pages 1-20, June.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:11:p:4657-:d:368373
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