Do Suppliers Care About Analyst Forecasts When Extending Trade Credit? A Quasi-Natural Experiment

Abstract

We examine whether suppliers care about analyst forecasts for their customers when making trade credit decisions. Using the suspension of the 2018 New Fortune Star Analyst Contest in China as an exogenous shock and employing difference-in-differences analyses, we find that after the suspension of this contest, there is a significant improvement in the information environment of firms followed mainly by analysts signing up for the 2018 contest, as evidenced by more accurate analyst earnings forecasts and lower bid-ask spreads, and that suppliers extend more trade credit to these firms. Further analyses reveal that the effect of the suspension of this contest on trade credit is more pronounced for firms with higher information asymmetry, for firms whose future earnings are more challenging to forecast, for firms whose suppliers have higher information acquisition costs, and for firms followed by more competent analysts. These findings support the view that the star analyst contest distracts analysts and shed light on the benefits of suspending this contest.