The Investment Value Of Securities Analysts Picking Research

Do analysts' recommendations have investment value? In other words, whether investors can gain superior profit by following analysts' public recommendations? This issue has long been debated by financial researchers and Practitioners. The academic literature in this area for developed countries is abundant and still growing.However, relevant study on China is still sparse. It was not until recent three or four years that securities research has emerged into a profession. And correspondingly, databases for analysts' research (including both recommendations and earnings forecast) are not available until recent years. Fortunately, there has been a rapid increase in the number of analysts, their reports and their influence, as witnessed by both anecdotal evidence and straightforward statistics.Motivated by above observations, I intend to scrutinize the investment value of analyst recommendations in China's emerging market. I collected above 10 thousand recommendations on about 1,000 companies from more than 1,000 analysts, the sample range from May 2005 to April 2008, totally three financial report years. I utilize event study, multi-regression, ANOVA analysis, and investment portfolio stategy to reach empirical evidence.This paper finds evidence supporting analysts' predictive ability. The market reaction following analysts recommendation are statistically significant and in line with analysts rating level, especially in small company subsample. The sample of positive rating (strong buy, buy) not only outnumber that of hold or underweight rating, but the postevent drift is also stronger in the former sample. When decomposing price reaction into stock picking and industry selection components, evidence shows that analysts have the ability to successfully pick stock as well as select industries.Investment portfolios constructed on the basis of analysts concensus rating report excess return. However, the net return deducted from total trading costs becomes insignificant. After analyzing analysts' preference and the cross-section predictability of 12 quantitative finance and market ratios, the paper find the combined stategy to be able to heap excess return of economically and statistically significance. I expect this study to be of interest to both practitioners and financial academics. For investors, the study enhances the understanding of the usefulness (and limitations) of security research in investment decisions. For researchers, the study helps explain analysts' role in price formation process, and provide precious perspective to observe market efficiency. For investment profession, the methodology explored in this study may find application in quantitative performance evaluation of the securities research or fund management profession.