The Study Of The Validity Of Security Analysts' Investment Rating And Its Influencing Factors

The securities analysts are the crucial information provider in the stock market; they make the stock valuation and the profit forecasting and then issue the corresponding investment ratings about the tracked listed companies on the basis of the survey and the information gathering through various channels. The numerous investors often base their investment on the analysts'ratings because they lack the related investment knowledge and are in the status of information inferiorities in that the operational mechanism of our stock market is not perfect in view of its emerging character and its transitional period. Thus, the validity of the securities analysts' ratings is of significance to investors. Then, are the analysts' investment ratings effective? Is there abnormal gain by buying or selling the specific stocks suggested by the analysts? Which factors will have an influence on the reliability of the investment ratings? We try to solve these problems by empirical analysis in this paper.First, we reviewed the related theories and the literature about the investment ratings; second, we described the present condition of the securities analysts' forecasting and ratings in detail by the descriptive statistics. Third, we did an empirical test on the corresponding abnormal gain, employing the methodology of the event study and selecting the investment ratings issued by the top ten securities traders between 2008 and 2009 as our study object. Then, we further analyzed the influence factors on the effectiveness of the investment ratings by the multivariate regression analysis method, basing on four aspects-the scale of the listed company, the ability of the analyst, the degree of the analyst's attention and the nature of the controlling shareholders.Regarding the study about the effectiveness of the investment ratings, we discovered that most ratings were "Buy" and "Outperform", "Neutral" and "Underperform" ones just accounted for a small proportion, which shows that the securities analysts have a serious "Optimistic Tendency". The stocks that were given positive ratings-"Buy" or "Outperform" had a remarkable abnormal gain in the short term and in the long term, but the ones that were given negative ratings "Neutral" and "Underperform" didn't reveal a remarkable abnormal return no matter in the short run or in the long run. The stocks that were given positive ratings had already gained a big abnormal return before the issuing of the ratings, which perhaps means that the analysts have some inside information; they still can obtain a certain abnormal return after the issuing, but the return declined gradually with the time on.As far as the test about the influencing factors on the investment ratings'validity, we found that:the bigger the company scale is and the higher the analysts'degree of attention is, the more remarkable the ratings'validity is; the analyst's ability can explain the long-term abnormal return, but not the short-term one; the nature of the controlling shareholders is just related to the positive ratings, but not the negative ones.Finally, this paper concluded with the suggestions that the relative management should protect the investors'interest, standardize the securities analysts'professional conduct, strengthen the information disclosure and enforce the firewall system.