Sell-side Analyst Following And Information Efficiency In A-shareMarket

Security analysts serve in security companies, mutual funds, and other financial institutions. Their duties are collecting and analyzing all sorts of information and data related to specific listed companies or industries. Security analysts often have special information channels and professional skills, so that they can provide more valuable and efficient information to other market participators. Based on the different roles on stock markets, security analysts can be categorized into sell-side analysts and buy-side analysts. Sell-side analysts only serve as information intermediates and their recommendations are not directly related to investment decisions or holding positions. A lot of foreign academic research has confirmed certain specific patterns of sell-side analysts’behaviors, and it might have complicated effects on the market information efficiency. There is not much research on local sell-side analysts on A-share market, and, if any, no consensus has been reached. This paper is trying to provide further evidence to support the relationship between sell-side analysts and information efficiency of A-share market.Based on the data of all A-share market listed companies from 2005 to 2012, this paper tested the relationship between synchronicity of stock price variation and analyst following, which was first developed by Morck, Yeung and Yu (2000). Further tests are run on the model developed by Ayers and Freeman (2003) in order to investigate the extent to which analyst following accelerate the incorporation of earning news into price. Finally, time horizon model and market trend model are further tested as the robustness check. They will also reveal more evidence on whether analysts following activities have different effects on the market information efficiency when time period varies or market trend varies.Stock price synchronicity model shows that there is a significant positive relationship between price synchronicity and analyst following after controlling for the influence of firm size, ownership structure, business performance homogeneity and institutional investors’ trading behaviors. Supplemental tests show that analyst following accelerates the incorporation of firm-specific component of future earnings news into stock price, instead of industry level or market wide earning news. Together, the results suggest that, contrary to the conventional wisdom, analysts do not specialize in impounding new information on companies or industries into stock price, but increase the market information efficiency by reducing firm-specific noise. In addition, time-horizon tests reveal the improvement trend of information efficiency of security analyst following behavior:analyst followings have shown greater and more significant positive relation with the incorporation of future earnings news into price. Market trend tests confirm the tendency that analysts provide more (less) accurate information in bear (bull) market. Incentive mechanism and "optimal tendency" might be responsible for this phenomenon.