A Study Of Analyst's Recommendation And Investor's Behavior Based On Behavior Finance

Behavior Finance has been a hot academic theme in recent years. It isn't based on the assumption of rational investors, which is the foundation of Modern Finance. With the research of people's real investment actions, Behavior Finance gives a better explanation to the anomalies in modern financial theory, and provides a new perspective for financial studies.To do research on Chinese investors' behavior, we should pay attention to such fact that there are masses of investors who are short of professional knowledge and investment experience. So, reading analysts' recommendation becomes one of the important and quick means for them to get information at lower cost. Following a systematical review of the development and studies of behavior finance and Chinese stock analysis and consulting industry, this paper studies whether the recommended stocks have investment value, and then whether and how the issue of recommendation affects investors' trading tendency. At last, there is a deep and particular discussion about the characteristics of disposition effect in Chinese stock market.The method of event study is an efficient approach to analyze recommendation's investment value. Based on introduction of event study and its primary process, we examine the performance of the stocks grouped by holding strategy recommended by Chinese stock analysts both in bull and bear market. The abnormal return is adjusted by three formulas considering size, industry and market effects. The results show that all of the recommendations of short term stocks should be viewed as a reverse indicator, while in bull market; the middle term stocks have short-lived speculative value.Based on the investment value of the stocks recommended by analysts, we further study the investor's response to recommendation. Using account and analyst recommendation data, we examine whether and how investors' trading tendency is affected before and after the issued recommendations. In this study, the investors' accounts are put into four styles by the characteristic of capital size and frequency of trading stocks which have been recommended. Our result presents that there are different exhibition in variant style investors. To those informed investors before issuing, their manner varies too. Even though one and the same style of investors, their trading tendency is diversely influenced by different type of recommendation in bull and bear market.Finally, as an important phenomenon in stock market, the disposition effect in Chinese stock market is also studied. Following brief depiction of concept, characteristic and influence of disposition effect, we test whether there exists disposition effect in Chinese stock market by: (1) the tendency to sell winners and hold losers (2) the number of holding days distinctly. By comparing the realized portion of gains and losses, this study presents a deep analysis of disposition effect, such as its seasonal and monthly motional characteristics. Further work shows difference in the investors with different capital size, trading frequency, profit and loss level. Besides, foregoing profit and loss states have significant effect to investor's disposition effect. When other influential variables were controlled, our result gives the relation between stock's profit and loss with investor's choice. And it indicates that disposition effect is one of investor's essential attribute in Chinese investors.