Impression management, government agencies' regulation and analyst forecasts: empirical evidence from an emerging market

Purpose This study aims to investigate the relationship between government agencies' regulation and analyst forecasts in an emerging market and whether this relationship is mediated by impression management in earnings press releases. Design/methodology/approach The sample consists of 1,816 quarterly observations of Brazilian listed firms from 2003 to 2021, based on data from Thomson Reuters®. The impression management of the sample firms is obtained by analyzing their earnings releases using the Watson Natural Language Understanding (NLU) platform developed by IBM®. We employ a manual firm-level classification procedure to detect regulated and non-regulated firms by government agencies. Findings Based on structural equation modeling, the findings suggest that firms regulated by government agencies present, on average, lower levels of impression management in earnings press releases. Additionally, we find that the level of firms' impression management, in turn, is negatively related to analyst forecast errors. These empirical results indicate that impression management in earnings press releases is a crucial mediating channel between government agencies' regulation and analyst forecast errors. Moreover, we find that government agencies' regulation has a positive and direct effect on analyst forecast errors, possibly due to its impact on other firm-level incentives and market dynamics, which may be positively or negatively associated with analyst forecasts. Originality/value This study contributes to the previous literature on the relationship between government agencies' regulation and analyst forecasts by theoretically discussing and empirically analyzing the mediating role of impression management as an important factor in this relationship, exploring the various facets through which state regulation ends up changing the structure of the informational environment in which companies are located. An important debate for the emerging markets literature is also provided, and policy discussions are featured.