Analysts' escape: The information cost of anti-organized crime

We estimate the information cost of anti-organized crime efforts, proxied by the quasi-natural anti-mafia campaign in China, from the perspective of corporate analyst coverage, an important information intermediary. Using data on Chinese A-share firms listed on the Shanghai and Shenzhen stock exchanges, our difference-in-differences analysis shows that corporate analyst coverage declines during anti-organized crime periods. The baseline results reveal an average decrease of 6.11 % and 6.07 % in analyst and report coverage, respectively. Mechanism tests suggest that this reduction is driven by diminished investor sentiment, increased information asymmetry, and heightened analyst herding behavior. Additional analyses indicate that anti-organized crime efforts lead to greater forecast inaccuracy and divergence among analysts, and reduced analyst coverage exacerbates firm financing constraints. Also, the main finding is more pronounced among poorly-governed firms, highly concentrated industries, and firms in weaker red culture cities. These findings are robust to a range of sensitivity tests. Our study contributes to the understanding of the information cost associated with anti-organized crime, particularly through the lens of analyst coverage.