| Security Analysts are a special group in capital market. Their duty is collecting and analyzing all sorts of information and data related to listed companies, and thus making judgments on their investment value. Based on their stock recommendations, investors make their decisions. Generally speaking, security analysts could be classifies as "buy-side analyst" and "sell-side analyst". However, when people mention about "security analyst", they usually only refers to sell-side analyst. Sell-side analysts serve in securities companies, and act as information suppliers, whose earnings forecasts and value estimations are widely diffused within investors. As important information processors and disseminators in capital market, sell-side analysts' forecasts and judgments are of great reference values for the research on the fields of capital market efficiency, corporate valuation, and cost of capital. For these reasons, sell-side analysts attracted great notion of both academic and industrial world, and so do this thesis.Security Analysts are newborn things in China capital market. Although their history in China is more than 10 years, they become mature to be a main information processing entity only in the past 5 years. Now analysts' earnings forecasts and stock recommendations have been the main reference of decision making of different level of investors. Security analysts are serving as a key role for information transmission in China security market. However, the study on security analysts in China is still at the initial phrase, and no systematic, in-depth studies have been conducted. Therefore, launching systematic theoretical and empirical study on China security analysts are of great significance, not only for enhancing public's understanding of security analyst, the new thing in China capital market, but also for filling in the gaps of systematic research in the field.This paper begins with a survey on the studies about the quality of analysts" earnings forecasts and the market reaction to analysts' stock recommendations. And then I combine it with research on psychological biases and interest connections of security analysts hiding behind their forecasts and recommendations. Based on our survey to prior literatures, to facilitate the study, I establish a research framework of the research on security analysts' report, with earnings forecast and stock recommendation as the main content. According to this framework, this paper use theoretical modeling and empirical analysis approach to conduct the research on the efficiency, bias and their reasons of information issued by security analysts. My paper is expected to offer a basic support and reliable proofs for the researches on several fields of finance and accounting such as cost of capital, corporate valuation, and market efficiency examination related to analysts' earnings forecasts and stock recommendations. This paper also offers several suggestions for China government's policy formulation on security market and stock investors' decision making.This paper consists of eight chapters. Major contents of each chapter are outlined as follows:Chapter one is the introduction, which briefly introduces several items relevant to this research: background, issues, content summary, and contributions.Chapter two is the literature review. In this chapter, I give a survey on the research about analysts' forecasts and market expectation, market reaction to analysts' reports, analysts' effect on the capital market, analysts' psychological biases, analysts' interest relations, and also relative literatures on China security market.Chapter three describes the institutional background of China security analyst industry, including the history of security consultant industry in China, the current situation of sell-side analysts in China, security analysts' job content and interest relations, and third-party evaluation for security analysts.Chapter four examines security analysts' forecast efficiency in China, including the accuracy difference between analysts' forecasts and time-series models, the bias of analysts' forecasts, and the relationship between analysts' forecasts and market expectations.Chapter five examines security analysts' market efficiency in China which includes short-term and long-run market reaction to analysts' recommendations, and factors that influence recommendations' information content.Chapter six is the research on analysts' psychological biases. In this chapter, the author conducts theoretical analysis and empirical examination on analysts' psychological biases based on behavior finance theory.Chapter seven is the research on analysts' interest relations. Based on the actual interest relations analysts face, the author establishes a theoretical model describing analysts' decision making on earnings forecast, therefore arrives at theoretical hypothesis on analysts' forecast and stock rating bias, and finally conducts corresponding empirical examinations.Chapter eight sums up the research findings of this paper, reports the lessons we learn, the caveats about this research, and points out the direction for further research.This paper has reached the following conclusions:1. Security analysts' earnings forecasts in China are more accurate than forecasts generated by time-series models which are based on historical earnings data, while analysts' forecasts don't provide a better surrogate for market expectations than forecasts from time-series models. The results indicate that investors don't realize the advantage of analysts' more accurate forecasts in China.2. During the issuance of analysts' positive or negative stock recommendations, there are significant excess returns in the identical direction accompanied with the stock. Moreover, the excess returns exist for a period of time after the issuance. The results show that analysts' recommendations contain information content, and the security market of China obviously doesn't reach semi-strong form efficiency. Besides, the information content of stock recommendation is positively related to analysts' reputation, while its relationship with the size of the rated company is not significant.3. There are "anchoring" effect and "representativeness" bias when analysts make earnings forecasts, and "anchoring" is the dominant factor, resulting in analysts' obvious under-reaction to earnings-relevant information when making forecast decisions. Furthermore, this kind of psychological bias and under-reaction is weakening as the earnings announcement date approaches and the uncertainty decreases.4. Generally, the forecasts and recommendations made by security analysts in China are over-optimistic, and the reasons behind which are the complicated interest relations facing the analysts. Among them are: (1) relationship with the management of listed companies, which has impact on analysts' ability of acquiring information and making accurate forecasts furthermore; (2) institutional investors and the investment bank department of the securities company, which both have an influence on the analysts' performance evaluation. Analysts' forecasts and recommendations are prone to be disturbed when facing with these interest conflictions.This study contributes in the following aspects:1. In terms of research framework, based on the features of China security analysts' reports, this paper has, for the first time, with earnings forecast and stock recommendation at the very core, following the research sequence of forecast efficiency - market efficiency - psychological bias - interest relation, built a new theoretical framework to study systematically the role of security analysts in information transmission in China security market.2. Based on the stepwise research on forecast accuracy - forecast bias - analyst forecast and market expectation, this paper reveals a full view of analysts' earnings forecast when studying the analysts' forecast efficiency. In addition, this is also the first work in China to study the origin of analysts' forecast accuracy, by means of analyzing the change of the accuracy difference between analysts' forecasts and time-series model in different issuance time, and obtain meaningful results.3. In the study of analysts' market efficiency, this paper has defined the "positive" and "negative" recommendations integrating foreign literature and China security market's reality. Therefore, my paper extends the relevant research on stock recommendation. Moreover, this paper has raised five hypotheses on the factors that influence analyst recommendations' information content, and has carried out empirical examination accordingly, finding a new path for the tests of relevant financial theory and policy effects.4. For the first time, this paper has analyzed and examined analysts' psychological bias based on behavioral finance theory. It has conducted theoretical analysis on the possible psychological biases of analysts when they are making earnings forecast decisions, proposed two new empirical models for the examination of analysts' psychological biases, and interpreted a widely adopted empirical model from a new angle. Thereby, this paper provides a referable train of thought for further researches on analysts' behavior.5. To my knowledge, this is also the first paper at lease in China to conduct research on the influence of security analysts' interest relations on the quality of the information they issued. Combined the reality of China security market and the analysts' motivation to maintain relationships with three key stakeholders—management of listed companies, institutional investors and the investment bank department, this paper establishes a theoretical model of the analysts' optimal decision under repeated gaming. Based on the model, this paper proposed six theoretical hypotheses, carried out empirical examinations for them, and arrived at a series of meaningful conclusions.
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