Ownership Structure, Equity Based Incentives and Analysts’ Forecast Properties : Evidence from China

This paper investigates the impact of ownership structure on the properties of analysts' forecasts in China's unique institutional environment. Although the China Securities Regulatory Commission (CSRC) has recently issued a series of polices on equity based incentive plan with the aim of aligning the interests of managers and shareholders, the study finds that relative low proportion (less than 25%) of listed firms have implemented such plan, and compared to other equity based incentives, such as restricted stock units (RSU), stock options are the most widely used measure. Moreover, concentrated ownership results in more accurate and less dispersed analysts' earnings forecasts, whilst high level of institutional ownership has a negative impact on analysts' forecasts accuracy. On the other hand, insider ownership, state ownership, and foreign ownership help little in explaining the determinants of analysts' forecast accuracy and dispersion. Interestingly, the use of different type of equity based incentives affect the properties of analysts' forecasts. Indeed, analysts forecast accuracy (dispersion) for listed firms using stock options as the equity based incentive is lower (higher) than that for listed firms using RSU. This study therefore provides some evidence that concentrated ownership can serve as an effective monitor of a firm's activities and facilitate corporate transparency, as reflected in the properties of analysts' forecasts, and the alignment effect of equity incentives (e.g. stock options) can be offset by managers' short-term opportunity behaviours