Securities Analyst Shares Of Stock Trading Information Asymmetric Impact Analysis

Although the real development of the financial analysts industry in China has only started about a decade ago, it is indeed very quick and vigorous due to the continuous expansion of the scale of China’s stock market and the rapid growth of institutional investors. On the other hand, China’s stock market information asymmetry has always been the concern of stock investors and regulators. As a result, financial analysts whose assumed responsibility is to reduce stock market information asymmetry shall perform their duty.Through gathering and analyzing information about listed companies, industry development, economic trends and macroeconomic policies which affect the market value of listed companies, financial analysts will give an investment recommendation as buy, sell, etc.. It is expected that the information capacity of the stock market will be expanded enough by financial analysts’ efforts so that the extent of information asymmetry of stock market will be reduced. However, we are not certain about whether analysts’stock recommendations in China really play that role or not. Even if the recommendations do play the role, we are still not sure about whether all kinds of stock investment recommendations reduce the information asymmetry or just part of them. Answers to those questions are not only related to the prestige and development of the financial analysts’ industry, but also to the investment decisions of investors and regulatory policies. And this is exactly the original intention to explore the answers to these questions.Based on the analysis of related theories, three hypotheses of this study are proposed, namely (1) there is a decline in information asymmetry of stock market after financial analysts upgrading their stock recommendations, while there is a rise in the degree of information asymmetry after financial analysts downgrading their recommendations;(2) changes(upgrades or downgrades) with different levels of recommendations before the change have different effects on information asymmetry;(3) recommendation changes with more jumps exert more effect on information asymmetry magnitude. In this paper, we analyze and sort out the data of changes in financial analysts’ recommendations and earnings forecasts during the period from January2008to June2011provided by the GTA CSMAR database. We then calculate the dispersion of financial analysts’ earnings forecasts which were predicted when each rating change was made in the sample as the measurement of information asymmetry. As mentioned before, the three assumptions are tested by means of independent samples t-test and cross-section regression for further verification.This paper finds out that:(1) there is indeed a decline in information asymmetry of stock market after financial analysts in China upgrading their stock recommendations, while there is a rise in the degree of information asymmetry after financial analysts downgrading their recommendations;(2) upgrades (or downgrades) with lower recommendation levels before the change will lead to an decrease (or increase) in the information asymmetry with a lager degree;(3) financial analysts recommendation changes in different jumps seem not to have different impact on asymmetric information of stock market. Overall, the financial analysts in China play a good role while mining favorable information in reducing asymmetric information by revealing them, but not a good role while disclosing negative information timely and effectively in inhibiting the deterioration of asymmetric information. Moreover, in accord with the theory of Behavioral Finance, investors in China’s stock market are more likely to be affected by the Representativeness Bias, which means stock investors in China are more sensitive to those rating changes which are quite different from previous performance of the stock.In addition, the paper also finds out that financial analysts in China tend to be more cautious and conservative to give more than one jump in the stock recommendation changes. And they rarely give the downgrades to the level of underperform or sell, which fails to assess the value of a listed company objectively. Finally, this paper presents some proposals for the financial analysts industry in China, stock investors, listed companies and regulators, aimed at solving the problem of the lack of capacity of financial analysts in China in the disclosure of adverse information, and the Representativeness Bias of stock investors.