Summary:
Product quality bears critical implications not only for firm survival and development but also for public welfare and high-quality economic growth. In recent years, guided by the strategy of boosting China's strength in product quality (“Quality power” strategy) and the goal of high-quality economic development, enhancing product quality has become an important pathway to strengthen corporate competitiveness, ensure the smooth flow of domestic consumption circulation, and improve societal well-being. However, frequent incidents of product quality violations in the past have led to substantial damage to the brand equity of the firms involved, posed severe risks to consumer health and safety, and hindered the sustainable development of the economy and society. While the literature predominantly highlights the roles of government regulation and media scrutiny in mitigating product quality violations, less attention has been paid to the effectiveness of alternative external governance mechanisms. From the perspective of capital market information intermediary monitoring, this paper investigates whether analyst coverage, as an important external governance mechanism, can supervise managers and thereby reduce product quality violations. Regarding the relation between analyst coverage and corporate product quality violations, theoretical reasoning provides competing predictions. On one hand, analysts possess interdisciplinary expertise. They can leverage their profound knowledge reservoirs and superior information-processing capabilities, and holistically evaluate multifaceted corporate attributes encompassing internal control, strategic management, and governance structures, enabling timely detection of violation risks. Furthermore, through site visits and direct engagements, analysts can articulate quality concerns to managers, potentially shaping managerial quality-related decisions. Such activities also reduce information acquisition and evaluation costs for other market participants, engendering broader social oversight of managerial quality decisions and reducing product quality violations. On the other hand, earnings forecasts disseminated by analysts may exacerbate managerial myopia, precipitating underinvestment in quality control and potentially increasing product quality violations. To assess the impact of analyst coverage on corporate product quality violations, this study uses a sample of Chinese manufacturing listed firms from 2002 to 2024, measuring product quality violations from both incidence probability and frequency dimensions. Violation data are manually collected from the official websites of product quality regulatory authorities, supplemented by searches via Baidu and Google. Analyst coverage data and control variables are extracted from the CSMAR and Wind databases. Employing a fixed effects model with extensive controls for firm-specific and regional characteristics, we find that firms with more analyst coverage exhibit significantly lower probabilities and frequencies of product quality violations. Mechanism tests reveal that analysts exert external governance through on-site inquiries concerning product quality practices, compelling managerial improvements in quality management protocols. Heterogeneity analyses indicate that the effect of analyst coverage is more pronounced when analysts possess industry specialization, command higher reputational capital, or maintain closer geographical proximity to covered firms. This study makes two contributions. First, it extends the literature on the impact of analyst coverage on corporate social responsibility. While prior research provides mixed evidence regarding this relationship, this paper reveals the inhibitory effect of analyst coverage on corporate product quality violations and its underlying mechanisms, enhancing the understanding of analysts' governance functions in China's capital market. Second, it contributes to the emerging literature on corporate social responsibility violations. By examining analyst coverage as a determinant of product quality violations, this study complements existing work investigating workplace safety violations, environmental violations, and other forms of social responsibility violations. Based on these findings, we propose several policy recommendations. First, analysts should be formally integrated into the social co-governance framework underpinning the strategy of boosting China's strength in product quality. This would fully harness their monitoring capabilities as capital market information intermediaries to establish a robust safeguard for public interests. Second, institutionalization and standardization of quality-related inquiries during site visits should be promoted, transforming analysts' informal oversight into binding market constraints that incentivize managerial internalization of external monitoring pressures. Third, differentiated incentive structures should be developed to leverage analysts' industry expertise and reputational capital, encouraging focus on corporate long-term development while providing sustained momentum for the strategy of boosting China's strength in product quality.
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