Security Valuation, Price Momentum, Investor Sentiment, And Analyst Recommendations

With the development and transformation of domestic capital market,more and more individuals and institutional investors have entered the market and become main market participants.At the same time,because securities analysts are the link between companies and investors,their information dissemination plays an increasingly obvious role in the securities market,and their rating reports are often used by investors as market disclosures.Accordingly,it's a key research to evaluate whether analysts give analyst recommendations and rating adjustments based on the company basic valuation,and whether analysts are also affected by other factors beyond their valuations.In this paper,we utilize the security recommendations and earnings forecasts of analysts between January 1,2007 and October 31,2016 in Shanghai and Shenzhen securities markets,studying the influential factors of analyst recommendations.The empirical finding shows that security valuation and exogenous variables—price momentum and investor sentiment all have a significant impact on analyst recommendations,and innovatively reveal the limited rationality of rating process of analysts in China.Firstly,this paper analyzes the hypothesis of “rational man” in traditional finance and behavioral finance,dividing the rationality of analyst behaviors.Secondly,this paper specifies the specific assumptions in the two valuation models.Thirdly,the above problems are analyzed through the empirical tests of two multiple regression models,and the corresponding research conclusions are given.This paper proposes six fundamental hypotheses on the two levels of analyst recommendations and rating adjustments,and solves four problems.The questions are as follows: firstly,analysts' earnings forecasts are linked to security recommendations and rating adjustments through valuation models;secondly,when calculating intrinsic valuation in absolute valuation models and relative valuation models,analysts usually adopt which type of rating decisions(issuing recommendations and making rating adjustments);thirdly,whether analysts will be affected by other irrational factors other than security valuation when making rating decisions;fourthly,what degree securities analysts in China are in rationality.The empirical results of this paper are as follows: on the analyst recommendations' level,the valuation and price ratio of two models has significant positive influence on the recommendation,irrational factors—price momentum and investor sentiment also have a positive influence on the recommendation;on the analyst rating adjustments' level,variations in the valuation and price ratio of two models also have a significant positive influence on the rating adjustments,the impact of variation in price momentum on the rating adjustments is also significantly positive,but the impact of variation in investor sentiment has no significant impact on rating adjustment.The specific conclusions of this study are as follows: firstly,earnings forecasts are correlated with the recommendation through stock valuation models;Secondly,the evaluation of analyst recommendations on company fundamentals(intrinsic value of securities)is based on absolute valuation models and relative valuation models;thirdly,analyst recommendations in securities analysts' investment report not only depend on security valuation,but also depend on price momentum and investor sentiment which being seen as the two irrational factors,and rating adjustments depend on security valuation and price momentum,compared with recommendations,analysts' rating adjustments have greater information contents,and are more rational;fourthly,from the perspective of the rationality of analysts decision-making,Chinese securities analysts are limited rational.The innovation of this paper lies in the new division of the rationality of securities analysts,the choice of influence factors on security recommendations and rating adjustments and the comprehensiveness of valuation models.The content of the article research is helpful to guide the analysts' rational investment,improve the efficiency of Chinese security market price,error the fixed price deviation,and increase resource allocation efficiency of domestic capital market.At the same time,it is of great theoretical and practical significance for analysts to improve their behavioral decision-making ability,correct their own cognitive and behavioral biases,and construct the Chinese securities market.