Politically Connected Firms, Legal Enforcement, and Analyst Forecast Attributes around the World

This project intends to study the association between a firm’s political connection and the earnings forecasts of analysts in an international context. The researchers propose that in addition to the inherent uncertainty of earnings, political connection itself complicates the analyst’s task, both because political favouritism is often granted covertly and because the paybacks of political connection often come in a windfall fashion that affects the time series pattern of the reported earnings of the connected firm. This conjecture, the analyst task difficulty hypothesis, suggests that analyst earnings forecasts should be less accurate, more optimistic, and more divergent for firms with political connection than they are for firms without it.The researchers also propose that the effective enforcement of the law can mitigate the impact of political connection on financial analyst forecast attributes. This conjecture, the law enforcement effectiveness hypothesis, predicts that the negative effect of political connection on analyst forecast attributes is attenuated in jurisdictions with more effective enforcement of the law. The research will contribute to the literature by identifying political connection as an additional dimension of forecasting difficulty. The effect of political connection on the forecasts of financial analysts can be mitigated only in jurisdictions with effective legal enforcement.