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The nexus between product market competition and the quality of analysts’ forecasts: empirical evidence from Chinese-listed firms

The nexus between product market competition and the quality of analysts’ forecasts: empirical... This study aims to explore the relationship between product market competition (competition hereafter) and the quality of analysts’ forecasts.Design/methodology/approachThis study uses industry-level (i.e. Herfindahl–Hirschman index), as well as firm-level (i.e. Lerner index) measures of competition and uses forecast accuracy and forecasts dispersion as proxies for analysts’ forecast quality. Further, this study considers a sample of Chinese-listed manufacturing companies for the period spanning 2005 to 2016 and uses various estimation techniques to empirically test the hypothesized relationship.FindingsThe results show that firms in highly competitive industries are characterized by greater accuracy and smaller dispersion in forecasts. Further, this positive association is more pronounced in SOEs as compared to NSOEs, and in industries characterized by intense competition. The sensitivity analysis further endorses the main results.Practical implicationsPresenting theoretical and empirical evidence, this study suggests that regulatory bodies should take steps to promote the competitive environment in China. This can help financial analysts in developing more accurate and reliable forecasts and ultimately can bring informational efficiency to the market. Finally, investors would be able to perform their business valuation process in a better way and make economic-useful decisions regarding their capital resource allocation.Originality/valueThe contribution of the current research is threefold: first, it adds to the limited literature available on this specific topic; second, this study examines the issue in China and further single out the influence of state-ownership and intensity of competition on the relation between competition and forecast properties; and third, this study provides theoretical arguments for the positive association between competition and forecasts quality while setting directions for future research on the topic and suggests the potential channels such as the reporting quality channel and the information disclosure channel that need to be explored further, to better understand the mechanism where competition influences the quality of analysts’ forecasts. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Asia Business Studies Emerald Publishing

The nexus between product market competition and the quality of analysts’ forecasts: empirical evidence from Chinese-listed firms

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1558-7894
DOI
10.1108/jabs-02-2018-0035
Publisher site
See Article on Publisher Site

Abstract

This study aims to explore the relationship between product market competition (competition hereafter) and the quality of analysts’ forecasts.Design/methodology/approachThis study uses industry-level (i.e. Herfindahl–Hirschman index), as well as firm-level (i.e. Lerner index) measures of competition and uses forecast accuracy and forecasts dispersion as proxies for analysts’ forecast quality. Further, this study considers a sample of Chinese-listed manufacturing companies for the period spanning 2005 to 2016 and uses various estimation techniques to empirically test the hypothesized relationship.FindingsThe results show that firms in highly competitive industries are characterized by greater accuracy and smaller dispersion in forecasts. Further, this positive association is more pronounced in SOEs as compared to NSOEs, and in industries characterized by intense competition. The sensitivity analysis further endorses the main results.Practical implicationsPresenting theoretical and empirical evidence, this study suggests that regulatory bodies should take steps to promote the competitive environment in China. This can help financial analysts in developing more accurate and reliable forecasts and ultimately can bring informational efficiency to the market. Finally, investors would be able to perform their business valuation process in a better way and make economic-useful decisions regarding their capital resource allocation.Originality/valueThe contribution of the current research is threefold: first, it adds to the limited literature available on this specific topic; second, this study examines the issue in China and further single out the influence of state-ownership and intensity of competition on the relation between competition and forecast properties; and third, this study provides theoretical arguments for the positive association between competition and forecasts quality while setting directions for future research on the topic and suggests the potential channels such as the reporting quality channel and the information disclosure channel that need to be explored further, to better understand the mechanism where competition influences the quality of analysts’ forecasts.

Journal

Journal of Asia Business StudiesEmerald Publishing

Published: Jan 10, 2020

Keywords: China; Product market competition; Forecast accuracy; Analyst following; Forecast dispersion

References