Does an anti-corruption campaign increase analyst earnings forecast optimism?

Abstract We examine the impact of an anti-corruption campaign on analyst earnings forecast optimism. Using hand-collected site visits data by the Central Inspection Team (CIT) in China that began in 2013, we document higher analyst optimism during CIT visit periods than during non-CIT visit periods. The results are robust to matched samples, placebo tests, alternative fixed effect and clustering specifications, endogeneity of CIT site visits concern, and alternative samples. Additional analysis suggests that local government pressure and firm bad-news-hiding explain the findings but it is not consistent with the improved firm fundamentals interpretation. Moreover, we find that the effect of CIT visits on analyst optimism is more pronounced for star, non-affiliated, and experienced analysts, supporting the notion that, because of their greater influence, local governments focus on pressuring these analysts. More important, the impact of CIT visits on analyst optimism is more salient if a CIT leader had previous work experience or longer work experience in the inspected province. Interestingly, we document a reversion in analyst earnings forecast optimism 60 days after CIT site visits, especially among the non-state-owned firms, suggesting that, after the CIT investigation, analyst optimism is no longer needed.