Seminar (Dept. of Accounting)

Theme：To Talk or Not to Talk: When Analysts with Social Ties to Firm Managers Acquire Bad News

Speaker：Ivy Zhang, Associate Professor, University of California, Riverside (UCR).

Time：2022-05-11 10:00

Address：Online Meeting

Language：Chinese/English

ABSTRACT:

Using unique data from China, we study whether sell-side financial analysts with social ties to a firm’s senior executives (i.e., connected analysts) can detect the firm’s fraud in financial reporting earlier than unconnected analysts and, upon such detection, how they disseminate the information. We find that connected analysts are significantly more likely to drop coverage of the fraud firms than unconnected analysts right after these firms’ first annual reporting containing fraudulent information. Meanwhile, mutual funds with a commission relationship to these connected analysts (i.e., client funds) are significantly more likely to unload their holdings of the fraud firms than nonclient funds after the fraud firms’ first fraudulent annual reporting. The holding change results remain even when the connected analysts do not publicly issue any negative opinions. Additional tests show that connected analysts are more likely to drop coverage when the stock is more important to their client funds, when they face more competition from other connected analysts and monitoring from the media, when their brokerage is larger in size, and when they are connected with more than one firm. Client funds are more likely to unload their holdings when they are large contributors of commission fees to connected brokerages. Overall, the evidence suggests that analysts with social ties to firm management have early access to bad news and choose to privately communicate the negative information to their clients.

SHORT BIOGRAPHY: 

Ivy Xiying Zhang received her Ph.D. in Business Administration and M.S. in Applied Economics from the University of Rochester. She is Associate Professor of Accounting at University of California, Riverside (UCR). Before joining UCR in 2018, she had been a faculty member at the Carlson School of Management, University of Minnesota for 13 years. Her research interests lie in the broad area of financial accounting. Her work has been published in top accounting journals such as Journal of Accounting and Economics, Journal of Accounting Research, The Accounting Review, Review of Accounting Studies, and Contemporary Accounting Research. She is a member of the Editorial Review Board of The Accounting Review and has been a reviewer for leading accounting and management journals.