The Impact of Disclosure Quality on Analysts’ Forecast in China

Abstract

Since the establishment of the Shenzhen Stock Exchange’s (SZSE) Disclosure Ranking System in 2001, listed companies’ disclosure quality has been increasing year by year in China. Better disclosure quality helps reduce the information asymmetry between the managers of those companies and external investors. This implies that analysts can access more timely, valuable, and reliable information to understand companies’ overall operating status, financial reports, and accrual components of earnings. As analysts can save time and costs when disclosure quality is higher, their earnings forecast error and optimism bias are reduced and the divergence in their opinions about the firm prospects decreases. We investigate whether disclosure quality affects analysts’ forecasting behavior in China’s securities market using the disclosure ranking data obtained from SZSE, and find that higher disclosure quality improves analysts’ forecast accuracy, alleviates forecast optimism, and reduces forecast dispersion.